0105 Futures Mag

How the Fed affects forex 48 | Patent battle heats up 64
www.futuresmag.com January 2005
US $4.95 CAN $6.95

0 1>
PAGE 24
0
74470 80964
Reproduction or use of the text or pictorial content in any manner without written permission is prohibited. 7 Copyright 2004 by Futures Magazine Group, 833 W. Jackson Blvd., 7th Floor, Chicago, IL 60607
Ho w St Fu a n pa ck d ge U Fe 60 p es
Markets to face tough test this year
Circle No. 116 or go to www.oners.ims.ca/4545-116
Contents
JANUARY 2005 VOLUME XXXIV NUMBER 1
24
cover story
COVER: CARL WALANSKI
Economic expansion: How solid is it?

By Carla Cavaletti Bauch
Some analysts are optimistic that 2005 will bring in a stronger U.S. economy. Others say certain factors will call the shots: oil prices, interest rates, the weak, and potentially weaker, dollar, the enormous trade imbalance, and whether international buyers opt out of investing in the United States. Our experts discuss how markets will be impacted.
F
By Andy McComas
EQUITY TRADING TECHNIQUES

36 An intraday setup for E-mini trading The S&P market boasts high risk, but if you can handle it, we offer a setup that will help you profit by entering a trade early.
TRADING TECHNIQUES
42 Fade the breadth
By Larry Connors
44 Open-ended questions for closed-minded people

By Howard L. Simons
48 Should forex traders battle the banks?

By Cornelius Luca
Market breadth doesnt work exactly as is taught. Heres insight on how it really works and how to better interpret it and apply it.
While the oats/notes spread has been effective on its own in the past, this year being an election year, we look to some other fun spreads for market analysis.
Despite the market's rapid growth, the role of central banks in foreign currencies is significant, and it pays for traders to understand that role.
Contents Continued, page 8
FUTURES (ISSN 0746-2468) is published monthly except semimonthly in January, June and September by Futures Magazine Inc. at 833 W. Jackson Blvd., 7th Floor, Chicago, IL 60607. Volume XXXIV, Number 1. Periodicals postage paid at Chicago, IL 60607 and at additional mailing offices. POSTMASTER: Send address changes to FUTURES, P.O. Box 2122, Skokie, IL 60076-7822. CPC IPM Product Sales Agreement No. 1254545. Canadian Mail Distributor information: EMI, P.O. Box 25058, London, ON N6C 6A8, Canada. Printed in the USA. COPYRIGHT 2004 by Futures Magazine Inc. All rights reserved. Reproduction or use of the text or pictorial content in any manner without written permission is prohibited. Subscription rates: United States, its possessions, Canada and Mexico one year, $39; two years, $68. All other areas, $92 per year. International online version also available; call 888-804-6612 for details. All orders from outside the United States must be paid in U.S. dollars by international money order only. Single copies $4.95 in the United States, $6.95 in Canada. Change of address must reach circulation office six weeks before it is to be effective; old and new addresses must be given. Express delivery service available. For rates, please call 888-804-6612 or 847-763-9565. CONTRIBUTORS: Return postage must accompany unsolicited manuscripts, photographs and drawings if return is desired. No responsibility is assumed for unsolicited material. Futures Magazine Inc. believes the information contained in articles appearing in FUTURES is reliable, and every effort is made to assure its accuracy, but the publisher disclaims responsibility for facts or opinions contained herein. MICROFILMS and MICROFICHE of all issues of FUTURES are available from University Microfilms Inc., 300 N. Zeeb Ave., Ann Arbor, MI 48106; Information Access Co., 11 Davis Drive, Belmont, CA 94002. The full text of FUTURES: News, analysis and strategies for futures, options and stock traders also is available in the electronic versions of the Business Periodicals Index.
FUTURES | January 2005
Reproduction or use of the text or pictorial content in any manner without written permission is prohibited. Copyright 2004 by Futures Magazine Group, 833 W. Jackson Blvd., 7th Floor, Chicago, IL 60607
Contents continued D E PA R T M E N T S
10 12 14 Editors Note Poor Bens Almanac Sound Off! 68 Trendlines Eurex US drops fees,
takes on New York Chartview: Riding the wave of FX growth Indexes ditch exclusive listing rights Climate exchange goes online International news Whats your resolution? group publisher / editorial director Ginger Szala
editor James T. Holter associate editor Daniel P. Collins assistant editor Yesenia Salcedo editor at large Steve Zwick contributing editors Murray A. Ruggiero Jr., Howard L. Simons contributing writers Japan: M.K. News art director Carl Walanski graphic designer Sean Kealey senior production manager Gabrielle Mouizerh
34
Forex Trader Trend principles,

tactics and new tools
New for Traders Book Reviews

Trend Following and Candlesticks, Fibonacci and Chart Pattern Trading Tools
70
20
Trading Places Two new

CFTC commissioners
72 74 82
Dateline January and February Ad Index Trader Profile Stefano Durdic:

Out with the old...
advertising director
midwest/southeast sales
Peter D. Djuvik phone: (312) 846-4606 fax: (312) 846-4638
21 22
Managed Money Review Hot Commodities Coffee, gold, corn

and crude oil
west/east coast sales manager

Tracey Goldvarg phone: (312) 846-4611 fax: (312) 846-4638 classified & web sales manager Jennifer Testa phone: (847) 526-7434 fax: (847) 526-7435 international sales representatives Europe: Carolyn Hicks London, England phone: (44) 208-340-3273 Japan: Ken Masunaga Hiroyuki Naruke M.K. News, phone: (81) 03-3664-9271 futures learning center sales manager Gary Kamen marketing manager Ryan Goodin
F E AT U R E S
52 Setting the stage for option selling
By Tim Zurick
MANAGED MONEY
60 How much are you paying?
By Daniel P. Collins
If you look at selling options from a different perspective, youll see how you can use them to profit. Here are a few scenarios using short option positions.
Do you understand the fee structures behind managed futures? Knowing what fees go to whom, and why, will help you maintain better track of your investment.
FUTURES 101
56 Oscillators explained
By Yesenia Salcedo
TRADE TRENDS
64 Patent this!
By Daniel P. Collins
futures magazine group office 833 W. Jackson Blvd. 7th Floor Chicago, Ill. 60607 phone:(312) 846-4600 fax:(312) 846-4638 futures circulation offices P.O. Box 2122 Skokie, Ill. 60076-7822 Circulation Service phone:1-(888) 804-6612 (U.S. only) phone:(847) 763-9565 (outside of U.S.) fax:(847) 763-9569 Calls accepted 8:00 am-4:30 pm CST e-mail: futures@halldata.com international subscription reseller Ken Masunaga phone:(81) 03-3664-9271 (Japanese language version available)
Using oscillators as a secondary indicator can help you better define where a market will move next to confirm trades. Heres a primer on the most popular.
TTs newly awarded patents on its display of market depth is going to shake things up in the industry. Will all ISVs profit, or will this turn into an antitrust issue?
Futures is a publication of Adams Business Media, a division of MCA Communications, LLC

chief executive officer Mark Adams chief financial officer Joseph Cohen senior vice president/human resources and operations Margie Davis corporate circulation director Joanne Juda it director Steve Smith director of operations/marketing Steve Lown
For reprint information contact: Marla Leopold FosteReprints (800) 382-0808
page 44
Poor Bens Almanac

EDITORS NOTE
heres no doubt that founding father Benjamin Franklin may not have met Red State moral standards (whatever those are), but he certainly was an incredible human being. Any man who could work as a writer, printer, statesman, inventor and be a revolutionary to boot deserves reverence and respect. One of his most generous and benevolent actions was to not patent many of his inventions, such as the Franklin stove or the lightening rod, believing some inventions were too important and must be freely available to everyone. I wonder how old Ben would have fared in todays world? As a publisher, I understand the importance of copyrights and the need to protect what you create. As a member of a family of attorneys, I also understand the need for and limits of patents. As a capitalist, I believe you should be paid for what you create. However, it seems, the role of patents can change the face of an industry, and in the case of the futures business, that time has come. As Associate Editor Daniel Collins writes in Patent this!, page 64, the latest move by ISV Trading Technologies has been to patent market depth software provided by TT. Problem is, its software, albeit developed by Harris Brumfield, CEO of TT, that now is, perhaps in some ways, used by many front-end vendors and brokers and could be construed broadly to affect all parties using electronic trading. Furthermore, if history is any indicator, it could involve the futures exchanges in a new lawsuit that could force them to settle with TT and end up paying a fee per contract traded. Daniels piece explains the issues involved in this very unsettling turn of events.
Understandably, the industry is a bit on edge. Not only have settlements been made with TT (ironically one current lawsuit is with eSpeed, whose parent company Cantor Fitzgerald started the whole rigamarole with purchasing the Wagner patent and suing all those involved, including the exchanges, who settled), but suspicions have arose that those settlements were nothing more than agreements to give TT some leverage in fighting a bigger battle. Whats interesting with this case is even the Commodity Futures Trading Commission may get involved, and already is waving around antitrust language that could make any good litigator squirm. Further, TT may have no interest in suing, but may be using it as a way to alter the course of how TT and other ISVs make money. Right now, ISVs dont receive commissions and have razor thin margins. Like any good company in the pipeline, they want to get a piece of the action. TT may have figured out a way to do it. A per contract fee (in a Dec. 14 letter, TT asked for a 2.5 per side fee) could be a burden to an industry that has fought hard to lower fees and terminate tax talks throughout its lifetime. How this will turn out is still unknown, but despite regulatory threats, the end-user meaning the trader will likely pay an extra fee. This brings us back to Benjamin Franklin, whose vision helped start a country, but today whose currency that is adorned with his face will be spent mightily, either in paying the patentee or the attorneys who will fight it. He might enjoy the fight...as he said, opportunity is the great bawd.
E-mail me at gszala@futuresmag.com
C U S T O M E R
S E R V I C E
C E N T E R
Subscription inquiries can be made toll-free at (888) 804-6612. Calls accepted between 8:00am-4:30pm CST. If you reside outside the United States, the number is (847) 763-9565. If you receive duplicate or have missed issues, please contact the numbers above, fax (847) 763-9569, or via e-mail, futures@halldata.com. Please provide your full name, address and zip code. Address changes can be sent to Futures Magazine, P.O. Box 2122, Skokie, IL 60076-7822. Please include your old label with your new address. Special issues are published three times a year; the Sourcebook, a directory of futures and options industry businesses, in January; the Guide to Computerized Trading, which provides a list of software database, Internet and computerized services, in July; and a trading issue in September. For credit card orders, send information to Futures Magazine, P.O. Box 2122, Skokie, IL 60076. Call (888) 804-6612 or (847) 763-9565 (outside of U.S.) or fax (847) 763-9569. Calls accepted 8:00am-4:30pm CST. Single special issue copies vary from $10-$20 each. Futures Learning Center provides booklets and educational services for traders. For information, call (800) 221-4352 (outside U.S., the number is (312) 846-4618).
Article reprint orders of 100 copies or more can be made through Marla Leopold at FosteReprints: phone, (800) 382-0808. Single issue copies ($10 each) can be purchased at (847) 885-3429. Questions regarding past articles location should be directed to (312) 846-4640, but may incur a $25 fee. Article submissions: Call, write or e-mail us for a copy of our writers guidelines. Questions about an article can be sent to the editors (gszala@ futuresmag.com). Questions are welcome, but due to time, we may not respond to everyone. For outside, by-lined articles, we provide the authors e-mail address or Web site in the biography. Futures Web site is our Internet version of Futures magazine (www.futuresmag.com). The Web site includes the latest issue of the magazine with full text of selected stories, daily updates with commentary on hot markets, spreadsheet downloads, a library of articles, market news and links to other sites. List Rentals Inquiries for list rentals can be made through Cheryl Naughton at (770) 995-4964.
10
Staying connected doesnt

mean being tied down. Do the things you want to do. Go where you want to go. And, bring Wall Street with you. QuoTrek is your mobile solution. Real-time quotes, charts and news Wall Street in the palm of your hand. Set yourself free with QuoTrek. Join the ranks of professionals like you who enjoy these great features:
STREAMING, REAL-TIME QUOTES AND NEWS Stocks, options, futures and indices from the worlds markets, plus news from PR Newswire and Business Wire STREAMING CHARTS Real-time data displayed in a line, bar or candlestick chart. Plus, the ability to apply many popular analytical studies
(except on BlackBerry)
PORTABILITY and COMPATIBILITY Access your portfolio on your Pocket PC, Palm or BlackBerry, plus smart phones
QuoTrek lets you take the market with you, wherever you go, with access via your wireless handheld device.
My entire financial portfolio is viewable in the palm of my hand.

Stan Brooks, President and Chairman of Brookstreet Securities Corporation
Get your FREE, 1-Month Trial!

Global quotes, charts and news
Exchange fees apply. QuoTrek is a registered trademark of eSignal. x13018
800.575.2521
www.quotrek.com/offer/fut
eSignal is a division of Interactive Data Corporation (NYSE: IDC).
Sound Off!
Have an opinion, question, objection, idea or beef? Let us know.
NO BIG BROTHER Automated trading is a troubling development [see A hands-on look at hands-off trading, November 2004]. [F]or the life of me I cant imagine why any normal small trader would think they could flip a switch and watch the profits roll in the window.
Charting applications are nice and being able to trade from todays slick packages is great, but you can keep your automated trading. If Im going to have a Big Brother managing my money, I at least want him to have a pulse. Alex Donner Indianapolis, Ind.
Sound Off! Futures, 833 W. Jackson Blvd., 7th Floor Chicago, Ill. 60607, Fax: (312) 846-4638
E-mail: gszala@futuresmag.com
Keep letters to 250 words. We reserve the right to edit for grammar, space and taste.
The Developers of Aberration and I-Master Introduce B-Master, a Bond Futures Trading System.
B-Master is a trading system that:
Is based on Econometric relationships, not typical price trend-following.
IN THE DARK ON CANDLES In the November issue [Day-trading with candlesticks and moving averages] your writer said of the 50 or 60 candlestick signals, only 10 signals have been identified as signals worth spending the mental time and energy learning. Do tell! What are those 10 signals. The article didnt tell us. John Thomas New York, N.Y. Stephen W. Bigalow responds: There have been some inquiries about the 10 major signals found in candlestick analysis. Those 10 major signals have been identified in the last 15 years of using the candlestick signals extensively. The reason they are considered the major signals is that they occur the most often in candlestick charts, as well as their accuracy percentage is relatively high. Instead of trying to explain each one here, it might be more advantageous for your readers to peruse my Web site. The site contains more than 300 pages of candlestick information for free. They can get a full explanation of what the 10 major signals appear like and some of the background of why they are effective. Editors note: Bigalows free site on candlesticks is www.candlestickforum.com. CORRECTION In our chart of the top 50 brokers in the December issue, the column headings for 2004 secured amount and 2004 adjusted net capital were switched. Futures regrets the error. Also, according to data submitted after deadline, American National Trading Corp. has both retail and institutional clients and offers both managed futures and online trading. Fimat is also a member of AEX, NYCE and CSE. A corrected table is available for review at www.futuresmag.com.
Avoids the "open equity give back" problem that is typical of trend-following approaches. Is lowly correlated with Aberration and I-Master. Doesn't require intraday data or monitoring. Can be tailored to your account size. Can be traded through "system-assist" brokers. Aberration has been a success for over ten years, and I-Master for over two years. B-Master was designed as a bond sector trading program that can be traded alone or in conjunction with our other well-established systems. It is the result of over three years of research into well-established economic models that have been consistent since the early 80s. The same model trades: the Eurodollar, Two-Year Notes, Five-Year Notes, Ten-Year Notes, Thirty-Year Bonds, and the Muni-Bond using the exact same rules and parameter settings. Visit our website for standalone performance, or integrated performance with our other trading systems: www.trade-system.com
1-800-372-3942
Voice: 704-752-7991 Fax: 704-752-7992
B-Master from Trade-System, Inc.

11276 Ballantyne Crossing Ave, Charlotte NC 28277
Visit our web-site: www.trade-system.com

PAST PERFORMANCE IS NO INDICATION OF FUTURE RESULTS
Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not been executed, the results may have under-or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown.
Circle No. 106 or go to www.oners.ims.ca/4545-106 or call 888-529-1512
12
A product of Futures Magazine Group. There is a risk of loss in futures trading. Past results are not necessarily indicative of future results.
Trendlines
NEW YEAR, NEW RIVALS
Eurex US drops fees, takes on New York

As it approaches its one-year anniversary, Eurex US extends its offensive in its fight for market share in U.S. Treasury contracts while establishing another front in stock index products. In this latest effort, the exchange is listing Russell futures, which are currently listed at the Chicago Mercantile Exchange (CME) and the New York Board of Trade (Nybot). Starting Jan. 1, all Eurex US customers will pay 5 per side for all futures and options transactions in U.S. Treasury products. All trades exe-
cuted in its order book are eligible for the 5 rate. Block trades will be subject to a 45 per side surcharge. The new prices replace a scaled structure that charged customers 25, 20 or 10 per side depending on monthly volume. However, while there appears to be a fee cut across the board, the new structure represents a net fee increase for many traders who have taken advantage of a fee holiday initiated in July. Eurex US traded a record 1.15 million contracts in November, surpassing the previous record in August of 1.04 million. Average daily volume was 57,000 in November. The trading records coincided with record volume at the Chicago Board of
Trade, where the vast majority of US Treasury futures are traded. Eurex US CEO Satish Nandapurkar says the new pricing structure was initiated after consulting with customers who sought a simpler model. He says this new model is sustainable. With the very low cost base and the way we run efficiently, we can sustain this pricing for the Treasury products far out in the future, Nandapurkar says. CBOT non-members pay 30 per side. RUSSELL ROLLOUT Eurex US never intended to challenge just the CBOT Treasury complex. The next targets are Russell 1000 and 2000 products scheduled to begin trading by the end of January. Eurex US has always been about providing a full service exchange with a full suite of products and services to the customer, Nandapurkar says. Unlike Treasury futures, Eurex US will be fighting for market share in contracts not as established as the CBOT complex. Further, with the Russell contracts, Eurex US will be able to offer the benefits of the first phase of its Global Clearing Link from the outset. Customers with positions in Eurexs equity index products, the Dax and Euro Stoxx, can trade the Russell indexes and receive margin offsets between the two sets of indexes by clearing all positions through the Clearing Corp. Nandapurkar says there are a lot of potential traders who are benchmarked to the Russell but trade the S&P 500 as a proxy because there is no liquid alternative. The New York Board of Trade lists the Russell 1000 and though the average daily volume of 3,306 is not overly impressive, it has built up open interest above 80,000. Our goal is to get the liquidity on the screen and bring those naturally benchmarked institutions into a 1000 product as opposed to having them continue to use the [S&P 500] as a
CHARTVIEW: RIDING THE WAVE OF FX GROWTH

Forex trading isnt only growing on the cash side. Forex futures trading also is setting records. While the $79 billion total daily notional value of CME currency product trading still pales in comparison to the OTC markets $1.9 trillion, its still a large and liquid marketplace. The below chart of the euro shows how volume has grown steadily in the CMEs most popular currency contract as the euro has appreciated consistently vs. the dollar a technical condition that may portend extended weakness for the U.S. dollar going forward.
Euro (nearest futures), weekly 1.35 1.30 1.25 1.20 1.15 1.10 1.00 .95 .90 .85 .80 Volume 200K 150K 100K 50K 0K 99
Source: CME, CSI
00
01
02
03
04
14
Trendlines continued
proxy, Nandapurkar says. Nandapurkar did not know what margin offsets would be available for traders holding Eurex listed equity indexes and Russell indexes but said savings would be significant. Eurex US has not announced the pricing structure for the Russell indexes. The Chicago Mercantile Exchange fees are $1.14 per side for non-members and 44 per side for proprietary traders. A spokesperson for the CME would not comment on whether the CME would adjust its fees but says, We are always evaluating our competitive position. We dealt aggressively with competition in the past and we will deal aggressively with competition in the future. By Daniel P. Collins RUSSELL PLAYS THE FIELD
Indexes ditch exclusive listing rights

Beginning as early as this month, you may be able to trade index options based on the Russell Investment Groups family of indexes at any U.S. options exchange. An exclusive agreement between Russell and the Chicago Board Options Exchange (CBOE) expires at the end of this year, and Russell announced in November plans to seek multiple exchange listings of index options and is negotiating possible license agreements with all six U.S. options exchanges. We are engaged in active contract negotiations with multiple exchanges and we hope to complete deals by the end of [2004], says Kelly Haughton, strategic director of Russell indexes. The move follows Russells current policy of signing multiple licensing agreements for its indexes to gain the greatest exposure possible. Futures on its three main products the large
16
International News
cap Russell 1000, small cap Russell 2000 and broad-market Russell 3000 are traded at the CME and Nybot and are also licensed to Eurex US. Haughton refers to CBOE as a great partner but sees a competitive advantage to multiple listings. The volume on our ETF options is up 10-fold in two years since we went to multiple listings. We suspect that it is because of multiple listings and we want to see that in equity options, Haughton says. The International Securities Exchange petitioned the SEC in 2002 to mandate the multiple listing of equity index options. The SEC has not taken action and whether or not the SEC has the authority to take such action remains up for debate. The Russell 2000, the most popular of the indexes listed at CBOE, has an average daily volume of 3,411 contracts year-to-date. By Daniel P. Collins TRADING SO2 FREE AT LAST
The New York Board of Trade and eSpeed announced in December a renegotiated agreement that terminates all provisions of a previous agreement. This frees Nybot to pursue possible joint ventures or mergers. Since moving its operations into the New York Mercantile Exchange building, Nybot has signaled it would be open to a closer arrangement with the other New York futures exchange. The agreement with eSpeed dates back to a 1997 pact between Cantor Fitzgerald and the New York Cotton Exchange and the failed Cantor Financial Futures Exchange. The exchange was an attempt to wrestle liquidity away from the Chicago Board of Trades financial futures complex through offering contracts exclusively electronically. The challenge, though a failure, arguably expedited the era of electronic trading. Nybot and eSpeed will continue with a service agreement, but eSpeed is now the sole owner of the dormant exchange and Nybot is entitled to enter into contracts, combinations, alliances and ventures of any kind with any entity, other than arrangements involving the electronic trading of Treasury futures. the listing of QQQ on Amex through June 2005. A spokesperson for Amex says the move was made early because there were no plans to extend the licensing agreement and Nasdaq wanted to list the QQQ as soon as possible. Amex will continue to trade the QQQ on an unlisted trading privileges basis. The New York Stock Exchange and the Boston Stock Exchange will not initially trade QQQQs.
UBER-SOLUTION?
GL Trade has purchased Ubitrade Group, an electronic trading and back office company. The deal lets GL Trade provide a fully integrated front-to-back solution for equity, derivative and OTC markets. GL Trade says this makes it the first supplier of a multi-instrument front-toback solution. The solution will combine GL Trades front-end trading station (GL WIN) and its middle office solution (GL Clearvision) with Ubitrades real-time clearing and settlement system for derivatives markets (UBIX).
Climate exchange goes online

Dec. 10 marked the start of futures trading on sulfur dioxide emission allowances on the newly established all-electronic Chicago Climate Futures Exchange (CCFE), a subsidiary of the Chicago Climate Exchange Inc. The contract, Sulfur Financial Instruments (SFIs), is designed to facilitate price hedging for U.S. Environmental Protection Agency SO2 emission allowances. Richard Sandor, chairman and CEO of Environmental Financial Products LLC, who was instrumental to designing the CBOT interest contracts, says this is the first time a futures contract will be based on an environmental property right. Ive always thought of futures as evolving, and were on the next wave of innovation and sulfur is just the
SLEEPLESS IN SINGAPORE
The CME is trying to expand global access to its markets by establishing its first Asian telecommunications hub in Singapore in the second quarter of 2005. The hub, which will reduce connectivity costs for customers in the Pacific Rim, will also enable direct network connections to CME Globex. The CME has more than doubled the number of European customers connected to CME Globex via its telecommunications hubs since their openings in Amsterdam, Dublin, Frankfurt, Gibraltar, Milan and Paris this year. According to a CME spokesperson, pricing initiatives and service offerings for customers in Asia have yet to be put together and it is too early to predict if the same results from the European hubs will be duplicated in Asia.
ANOTHER Q FOR YOU

On Dec. 1 the Nasdaq 100 Index Tracking Stock (QQQ) switched its listing from the American Stock Exchange (Amex) to Nasdaq with the new trading and market data symbol QQQQ. As an OTC security, QQQQ is no longer subject to ITS rules, including the trade-through rule, and the Securities and Exchange Commissions de minimis ($0.03) exemption. Also, QQQQ will be exempt from Nasdaqs short sale requirements, allowing short sales in this ETF to execute on a down bid tick. The transfer of the listing was made possible after Nasdaq and Amex mutually agreed to amend the terms of the original agreement, which provided for
www.futuresmag.com | January 2005
17
32 years of Futures...
Futures has thrived for more than three decades by providing unbiased tips, news, profiles, advice and current market analysis. Here, we spotlight some events Futures has covered during its 32 years. This flashback includes some articles from the January 1989 issue.
Trendlines continued
beginning, Sandor says. The idea that markets could be used to solve social and environmental problems is very, very novel, but there are the critical problems that we face. When I was a student of economics and when I taught economics, I was always taught that air and water were free goods, and there was so much supply that there was zero price and that you never had to worry about that. Sandor says that myth is over: The most precious commodities we have are the most valuable ones the air we breathe and the water we drink because they are absolute necessities of life. According to Sandor, the idea for how these contracts would work was born a long time ago when the extensive acid rain in the Northeast lead to the Clean Air Act of 1990s cap and trade program in SO2 allowances. Sandor was asked if a market could be made from that. Could somebody be given a quota, a property right, and if they dont use all of that quota can they sell that? And could somebody else be given a quota, and if they use more than their quota, they can buy it as long every year you lower the quotas in the country, you will be curing the problem, he says. At the time, 18 million tons of sulfur dioxide was being emitted into the air each year and the objective of the 1990 Clean Air Act Amendment was to cut that amount in half to 9 million tons a year. This year the amount is around 9 million tons emitted. The contract is designed for utilities such as electric power plants and other industrial polluters, which by virtue of the amendment to the 1990 Clean Air Act, must make reductions to their SO2 emissions. The CFTC designated CCFE as a contract market in November. Each contract is for 25 tons of sulfur dioxide emission allowances. Sandor says the sulfur dioxide crop is bigger than wheat. By Yesenia Salcedo
A short piece discussed the evolving nature of the U.S. Federal Reserves active intervention in the currency markets and how futures were expected to become more utilized by the central bank. We quoted David Bodner, EVP at Bank Julius Baer & Co. Ltd: [The Fed] would not use Chicago to hedge its position but would take an open position to have an impact on the market. For a current review of central bank machinations, see Should forex traders battle the banks? (page 48). We looked at guidelines for commodity pools proposed by the North American Securities Administrators Association. Among the suggestions were suitability requirements for investors and restrictions on fees and brokerage commissions. See How much are you paying? (page 60) for a discussion of the current fee situation. Futures profiled one of the largest locals at the London International Financial Futures Exchange, Alan Dickinson. Dickinson was a pit trader who looked for flag formations to exploit intraday. Im a great believer in the flag formations breakout up or down, he said. He also suggested traders avoid surprises by not trading in front of major government reports.
Whats your resolution?

Jan. 1 delivers a new year and encourages new resolutions, stated or not, for most everybody. Leaders in the trading industry are no different. Heres what a regulator, an exchange leader and a trading guru resolve for 2005... I resolve to strengthen customer protection rules, especially for retail forex. Daniel Roth, president and CEO of the National Futures Association My resolution for 2005 is to read Futures magazine without fail from cover to cover, especially the columns by Dan Collins. Leo Melamed, chairman emeritus of the CME Bet small, follow the rules and stay alive. Larry Williams, currently running www.ireallytrade.com
18
Tools for Every Trader

Get real-time, global quotes, charts and news risk-free for 30 days!
REAL-TIME QUOTES
Get reliable, global, award-winning, stock, options and futures data (including Asia/Pacific exchanges) plus market depth and Forex
FREE CHARTING
Maximize your strategic advantage with technical analysis, customizable indicators, back testing and alerts
MARKET-MOVING NEWS
Access a wealth of respected news sources, including AFX UK, European and Asian news
eSignals News Manager makes it simple to search for news headlines based on symbol, service and/or keyword. Plus, search by Dow Jones categories to easily find news by topic or industry.
NEW!
eSignal provides award-winning, Internet-delivered, real-time market quotes, charts, news, fundamental data and more, direct to your PC or laptop.
sed by individual investors, hedge fund managers, brokers, money managers, fulland part-time traders, eSignal is the number 1 choice of investors like you with more awards and more users than any other service. eSignal offers you reliable, affordable, Internetdelivered market data coupled with advanced decision support tools. Get continuously updating quotes, charts, news and fundamentals plus analytics and strategy tools.
Plus!
MARKET DEPTH
Find hidden moves with U.S. market depth from the NYSE, NASDAQ, ECNs, Pink Sheets, plus the CME, CBOT and Forex
BACK TESTING
See how your strategies might have performed had you made trades using them
OPTIONS
Analyze your trade with OptionsPlus an analytical and decision support tool for stock option traders
FUTURES
Make more informed futures trades with enhancements such as the Quoteboard, Fast Market Indicator and marketprofile
Try eSignal for yourself. Call today to sign up for your risk-free, 30-day trial. It could be the best trading decision youll ever make.
FOREX
Trade the largest financial market in the world, 24 hours a day, using Forex data and market depth
I tried several data providers and found eSignal to be the best...my profits on one trade made enough to pay for my annual eSignal price! K. Long
Call Today for Your Risk-Free, 30-Day Trial!*
800.824.1436
www.esignal.com/offer/fut
eSignal is a division of Interactive Data Corporation (NYSE: IDC)

*All fees will be refunded to you, minus any taxes and applicable add-on service/exchange fees, if you cancel within the first 30 days of service. Some restrictions apply. Exchange fees apply. Call for details. x13017
A Tradition of Excellence
Professional Execution Services for Systematic Traders 3rd Party and Proprietary Trading System Support Professionally Managed CTA Investments
Trading Places
BY YESENIA SALCEDO
Two new commissioners at the CFTC

ichael V. Dunn and Fred Hatfield were sworn in as commissioners of the Commodity Futures Trading Commission (CFTC) in December. Dunn says his main goal is to work toward ensuring theres no fraud or MICHAEL V. DUNN manipulation in the futures business. Each of the commissioners brings something to the table and what I bring is a great deal of background in regulatory FRED HATFIELD development and writing, Dunn says. I also have a great deal of background in the agricultural commodity programs, Dunn says. He says he understands how important commodity exchanges are for producers in agriculture, who are true hedgers looking to the exchanges for assistance in price discovery. Dunn says one of the main events he looks forward to is the reauthorization of the CFTC Act of 1974. Its a 20-year review and were going to look at whats worked and what hasnt worked, he says. Hatfield says he is committed to protecting the public interest and the integrity of the exchanges. I have a strong interest in efforts to prevent and deter market manipula-
Send news of personnel moves to:

Futures, 833 W. Jackson Blvd., 7th Floor Chicago, Ill. 60607, Fax: (312) 846-4638 Attn: Yesenia Salcedo
E-mail: ysalcedo@futuresmag.com
Call today for a FREE introductory package.

TEL: 800.854.8203 INTL: 949.548-2021 WWW.WISDOMFINANCIALINC.COM
Futures and options trading involves risk of loss. Circle No. 123 or go to www.oners.ims.ca/4545-123
tion, and certainly the energy sector is of great interest to me, Hatfield says. I hope to bring a balanced perspective to the commission reflecting my experience in both the public and private sectors. I understand the need for business to be able to operate efficiently without unnecessary encumbrances. In addition, my years of public service have taught me the importance of government oversight and customer protection. Dunn previously was director at the Office of Policy and Analysis at the Farm Credit Administration, and Hatfield was chief of staff to Senator John Breaux (D-LA). Jukka Ruuska has been named president of the Stockholm Stock Exchange. Ruuska will continue as president of OMX Exchanges. James Steadman has been promoted to global product manager and head of futures at eSpeed. Most recently he was responsible for the worldwide development and growth of eSpeeds futures products. You Just Trade hired Nick DeCock as a senior associate. He most recently was a project manager at Accenture. Michael Adam has been named chief investment officer at Aspect Capital Ltd. He is co-founder of Aspect and previously was director of risk management. The Chicago Mercantile Exchange has promoted James E. Parisi to managing director and chief financial officer. He previously was managing director and treasurer.
20
Managed Money Review

BY DANIEL P. COLLINS
Comeback kids
trong returns in October and November put many commodity trading advisors (CTA) back in the black after what had been a difficult year. The Barclay CTA Index posted a preliminary return of 2.78% for November (78.9% reporting) following an increase of 2.2% in October and 1.2% in September. The October return made the overall index positive on the year, although more than 50% of the CTAs listed in the data were still down through October. The late year surge was due to strong trends in currencies and metals. The index experienced five consecutive down months and threatened to post a loss for only the fourth time in 25
years. The difficult patch broke a string of nine consecutive quarters of growth, as money under management remained flat for the third quarter. CTAs may not be out of the woods, though, as a strong reversal in gold and the dollar in December may have taken back many of their hard-earned profits. The year was a return to the industrys roots as the agricultural traders index vastly outperformed all other sectors and discretionary traders outperformed systematic traders. WHATS THE JUICE? Mark Cuban, owner of the National Basketball Associations Dallas Mavericks, is planning to create a
hedge fund based on sports gambling, according to Cubans Web blog. Cuban, a successful investor, said there was better available information regarding the performance of professional sports teams and their players than on public companies. He may not have started on the right foot with his potential regulator, however, writing: The gaming commission appears to actually enforce rules of play, unlike the [Securities and Exchange Commission]. Cuban would not be placing bets but selecting successful gamblers, la a fund of funds. I will find the best and the brightest, with a [confirmed] track record and hire them, he wrote.
Comparing index returns

S&P 500 Total Return Index Lehman Brothers Treasury Index Morgan Stanley EAFE Index Futures Public Funds (September) October +1.53% +1.28% +3.35% +3.46% YTD +3.06% +8.05% +5.70% -6.84%
public funds summary November 2004 Number reporting: 99 for the month: +5.02% Average performance
Funds up: 84 Down: 14 Unchanged: 1
Top performers in November

Trading advisor(s) November Return YTD Shearson Select Advisors Futures Fund . .J.W. Henry . . . . . . . . . . . . . . . . . . . . . . . .+23.08% . . . . . .-1.55% Smith Barney Tidewater Futures Fund . . .Chesapeake Capital Corp. . . . . . . . . . . . . .+20.43% . . . . .+1.59% Hutton Investors Futures Fund II . . . . . . .J.W. Henry; Trendlogic . . . . . . . . . . . . . . .+17.75% . . . . .+6.66% Quadriga Superfund, L.P. Series B . . . . . .Quadriga Capital Mgmt. . . . . . . . . . . . . . .+17.33% . . . .+16.34% Dean Witter World Currency Fund LP . . .J.W. Henry; Millburn Ridgefield . . . . . . . .+16.54% . . . . .-11.80% Worst performers in November Smith Barney AAA Energy . . . . . . . . . . . .AAA Capital Management . . . . . . . . . . . . . .-3.20% . . . .+50.10% Blue Danube Fund - Futures Dynamic* . .Multiple managers . . . . . . . . . . . . . . . . . . . .-2.72% . . . . .-10.62% TriFex Trading Fund LP . . . . . . . . . . . . . .Treasury Management Service Inc. . . . . . . .-1.41% . . . . .+5.63% GSL-JWH Strategic Allocation* . . . . . . . .J.W. Henry . . . . . . . . . . . . . . . . . . . . . . . . . .-1.03% . . . . . .-0.08% AHL Diversified Guaranteed II* . . . . . . . .Man Investments . . . . . . . . . . . . . . . . . . . . .-0.96% . . . . . .-6.66% Fund
Septembers top CTAs

October Barclay CTA Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .+2.22% Barclay Sub-Indexes: Agricultural Traders . . . . . . . . . . . . . . . . . . . . . . . . . . . . .-0.21% Currency Traders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .+2.05% Diversified Traders . . . . . . . . . . . . . . . . . . . . . . . . . . . . .+2.71% Financials and Metals Traders . . . . . . . . . . . . . . . . . . . .+1.47% Discretionary Traders . . . . . . . . . . . . . . . . . . . . . . . . . . .+0.15% Systematic Traders . . . . . . . . . . . . . . . . . . . . . . . . . . . . .+2.77% More than $10 million under management 1. John W. Henry & Co. (Dollar) . . . . . . . . . . . . . . . . . .+26.08% 2. John W. Henry & Co. (Original) . . . . . . . . . . . . . . . .+22.02% 3. John W. Henry & Co. (Strat. Alloc.) . . . . . . . . . . . . .+20.04% 4. Willowbridge Associates (Argo) . . . . . . . . . . . . . . . .+18.77% 5. Pacific Asset Mgmt. (Alpha) . . . . . . . . . . . . . . . . . . .+17.45% Less than $10 million under management 1. Chicago Capital Mgmt (Intermediate.) . . . . . . . . . .+45.99% 2. Schindler Trading . . . . . . . . . . . . . . . . . . . . . . . . . . .+32.02% 3. Visioneering R. & D. Co. (V-100) . . . . . . . . . . . . . . . +21.99% 4. Alterama, Inc. (Forex) . . . . . . . . . . . . . . . . . . . . . . . .+20.00% 5. Calaveras Trading (Standard 2X) . . . . . . . . . . . . . . .+15.29%
Based on estimates of the composite of all accounts under management; does not reflect the performance of any single account. Source: Barclay Trading Group Ltd., Fairfield, Iowa; (641) 472-3456
YTD . . .+0.08% . .+14.82% . . . .-3.04% . . . .-1.93% . . . .-3.16% . . .+6.74% . . . .-2.49% . . .-25.26% . .-+12.72% . . .+4.47% . .+18.96% . . .-28.53% . . .-11.20% . . .-10.14% . .+36.92% . . .-25.33% . . . .-6.92%
2004 results
(through Nov. 30)
Number reporting: 99 Average performance for the year: -0.20% Funds up: 48 Down: 51 Unchanged: 0 YTD
Top performers in 2004

Trading advisor(s) November Return Smith Barney AAA Energy . . . . . . . . . . . .AAA Capital Management . . . . . . . . . . . . . .-3.20% Triad Trading Fund LP . . . . . . . . . . . . . . .AAA Capital Management . . . . . . . . . . . . . .-0.81% Salomon Smith Barney Orion Futures Fund Multiple managers . . . . . . . . . . . . . . . . . . .+2.08% Quadriga Superfund, L.P. Series B . . . . . .Quadriga Capital Mgmt. . . . . . . . . . . . . . .+17.33% Dean Witter Portfolio Strategy Fund . . . .J.W. Henry . . . . . . . . . . . . . . . . . . . . . . . .+13.01%
Fund
. . . .+50.10% . . . .+48.28% . . . .+26.23% . . . .+16.34% . . . .+14.22%
Worst performers in 2004 Blue Danube Fund - Futures Aeneas* . . .Merit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .+0.12% . . . . .-29.47% Moriah Futures Fund, L.L.C. . . . . . . . . . . .Jalex Trading . . . . . . . . . . . . . . . . . . . . . . . .+1.61% . . . . .-29.33% GSL-JWH INTL Foreign Exchange* . . . . .J.W. Henry . . . . . . . . . . . . . . . . . . . . . . . . .+0.47% . . . . .-26.12% GSL-JWH Currency Strategic Allocation* J.W. Henry . . . . . . . . . . . . . . . . . . . . . . . . . .+0.30% . . . . .-25.34% AHL Currency Fund* . . . . . . . . . . . . . . . .Man Investment Prod. Ltd. . . . . . . . . . . . . .+1.12% . . . . .-21.36%
Note: Listed return may not be fully attributable to listed advisor(s). * Offshore fund.
21
Hot Commodities
Coffee higher...eventually
The notion that low prices take care of low prices is a basic tenet of the law of supply and demand. Jack Scoville, VP at Price Futures Group, sees the coffee rally as a sign of the return to a more historical valuation of the Coffee (Mar. 05) daily commodity after years of low prices dampening supply and sparking demand. Scoville says low prices have hurt the farmers bottom line, which has led some to give up farming coffee and others to spend less managing their crop. Brazilian farmers havent fertilized [coffee plants] in years, Scoville says. Source: eSignal Overall production was off five million bags last year and 2005 is an off year in the on-one-year/off-the-next crop. We are looking at the second straight year of inventory declines, Scoville says. More immediately, the flowering for next years Brazilian
crop is down while the Central American crop looks poor, and producers in Southeast Asia are experiencing a drought. You are going from a market that people cant sell enough coffee to cover their cost to one [where they] dont know how much coffee is out there, Scoville says. After breaching $1 per lb. briefly in November, the March contract found support at 95. They tried to take out 95 and they have [failed]. It has been an impressive market, Scoville says. Scoville sees coffee moving back to a historical range between $1 and $1.25 in the near term and possibly higher long-term. Peter DeSario, softs analyst for Elliott Wave International, while recognizing that coffee is in a long-term bull market, says it is primed for a significant downward correction. It has not rallied impressively since the August low, DeSario says, pegging the mid-60 level as his downside target.
Gold surprise
Just as we were preparing to talk about the nearly uninterrupted three-month uptrend in gold futures, it up and tanks $15 in one day. Despite the dramatic Dec. 8 sell-off in gold, analysts Futures spoke with are still bullish though a little more restrained. I am cautiously optimistic that gold will come back, but you have serious chart work to do, says Charles Nedoss, senior account manager at Peak Trading. Though Nedoss sees the move as a correction in an overbought market, its fierce nature makes it more than a garden-variety correction and because serious technical damage was done, he is not recommending buying this dip. I would like to see a consolidation phase before getting back in on the long side, Nedoss says. Dave Meger, director of metals trading for Alaron, is less fazed by the velocity of the move and remains bullish. You might see some residual selling, but it will bottom out and return vehemently to the uptrend, he says. Both analysts point out that the dollars failure to retain all of its gains on Dec. 8 was a sign of a correction instead of a trend shift. While fund selling fueled the early sell-off, stop-loss selling from retail traders who were late to the long side accounted for much of the move.
Gold (Feb. 05) Daily
Source: eSignal
Late-comers to the [gold rally] got squeezed out. They got hurt and bailed out, Meger says. The bull trend is intact and we will see higher prices in the weeks to come. Nedoss points out that the gold rally has closely followed the dollar and he does not see a shift in that relationship. The economics have not changed, Nedoss says. Gold has reacted to the weak dollar. I dont see that our fiscal house is back in order.
22
Corn (Mar. 05) daily
Is crude rally over?

The mere volume of bullish news over the last year supporting higher crude oil prices had many analysts declaring a paradigm shift in oil pricing. Crude oil futures prices had never been able to sustain $30-plus levels for very long, but some analysts now believe it will never dip below $30 again. That said, crude oil has dropped $14 from the high above $55, and some analysts see much more to come. Kyle Cooper, energy analyst at Citigroup Global Market, is targeting $30 to $35 crude oil by the second quarter. Cooper says the rally overshot because the market was reacting on fear. Fear is what got us to $55, Cooper says.
Source: eSignal
Corn under pressure

A record crop this fall coupled with declining export figures and higher than expected feed wheat production is putting pressure on corn, according to industry analysts. Shawn McCambridge, senior grains analyst at Prudential Financial, says the U.S. Department of Agriculture has been ratcheting down expected export numbers and that high ending stocks of 1.8 billion bushels will likely grow to 1.9 billion. That is a lot of corn hanging over the market at this time, McCambridge says. Despite this, McCambridge sees limited downside potential at this level. Bears are targeting the $2 support level in March corn but if it is taken out, McCambridge says the March contract will find support at the December 2004 contract low of $1.9150. James Barnett, grains analyst for Refco Global Research, says the record crop along with slow farm sales and slow export sales are creating a more bearish scenario and is targeting $1.80 for March corn. Barnett says bears can take as much as 20 to 25 out of the March contract by selling rallies as March corn reaches a winter low near $1.80. McCambridge is more bearish longer term due to farmers using government loan deficiency payments (LDP) to avoid selling into the cash market at current prices. He says farmers are using LDP to cover costs and holding out for better cash market prices. Where this will pressure the market is further out. The 2005-06 prices are most susceptible to record lows under certain circumstances, he says. He adds that if farmers are still holding higher than normal stocks into the late summer and the prospects indicate another strong crop, prices could dive to $1.75.
Crude oil (Jan. 05) daily
Source: eSignal
IFR Pegasus energy analyst Tm Evans agrees. We enjoyed being afraid. We worried about everything, Evans says. To be fair, there was a lot to be worried about. Venezuela, Nigeria, Iraq, Russian oil producer Yukos and a string of hurricanes hitting the Gulf Coast. In reality, only hurricane Ivan succeeded in dramatically affecting production. A lot of our worst fears were not realized, Evans says. Both Evans and Cooper say the market continued to worry about potential production disruptions while inventories slowly recovered. Cooper says the recent sell-off was intensified because the market took its eye off of rising inventories. The move may not be over. Just because it came down to $42 from $55, doesnt mean it is a bargain here, Evans says. Inventories on Dec. 8 are 5.8% higher than one year ago when crude oil was at $32.10, Evans says. He adds that worldwide demand tends to dip by 700,000 barrels a day in the first quarter and 1.5 million barrels in the second quarter. If we have a little surplus now, we will see a larger surplus in the first quarter and an even larger one in the second, Evans says.
23
COVER STORY MARKETS

Rising interest rates, an enormous trade imbalance, a swelling current account deficit and a falling dollar. These are only a handful of the economic issues the U.S. economy will face this year. So how will the economy respond? Will this recovery stay on track?
Economic expansion: How solid is it?

BY CARLA CAVALETTI BAUCH
C
24
ommon catch phrases economists have used to describe their predictions for 2005 include moderate growth and continued expansion. But many agree that if a wild card is thrown into the mix such as high oil prices these economic forecasts easily could go from temperate to extreme.
RISING RATES The interest rate debate has not changed much since the mid-year economic update last July. The question is not if, or for that matter, even when, but how much will interest rates rise in 2005? Ashraf Laidi, chief currency analyst with MG Financial Group, says 2005 interest rates will depend largely on oil prices. If oil stabilizes to the low $40s, I see U.S. interest rates going to 3% and not above 3%, he says. Some analysts, however, predict a slightly higher increase. Ken Mayland, president of ClearView Economics, an economic consulting firm, predicts that the Fed will increase rates several times throughout the course of 2005. I see the Fed fund rate reaching 4% by yearend, Mayland says. Michael Malpede, senior foreign exchange analyst at Refco, agrees. He explains, My expertise is in currencies not interest rates, but my prediction is the Fed will ultimately get to a 4% Fed fund rate and I believe it is conceivable to see 6% in the 10-year by the end of the year. Predictions on inflation, on the other hand, differ rather widely. Mayland explains that basic economic factors such as a rise in average wage growth, higher earnings and a falling dollar give rise to inflationary pressures, which leads Mayland to believe that inflation will increase in 2005. Inflation could be the sleeper item of the year, Mayland says. Mark Zandi, chief economist with Economy.com, however, characterizes 2005 as having low inflation. But Zandi does believe both inflation and interest rates will be higher than last year. He expects the Fed fund target rate to reach 3.5% by year-end and the 10-year yield to climb slightly above 5%. HOW LOW CAN IT GO? Since mid-October the dollar has fallen 7% against other main currencies. Recently, it has seen all-time lows against the euro, a five-year low against
SERIOUS MISMATCH
BCA Research stated in a Nov. 30 report that there is a serious mismatch between the dollars trend and regional trade imbalances. According, to BCA Research, the U.S. trade deficit with other industrialized countries should soon start to shrink in response to the dollars sharp drop against the major currencies. BCA Research states that the longer Asian countries resist an upward adjustment in their exchange rates, the greater the dollar undershoot versus the euro and other currencies, adding that current trends are unsustainable and Asian currencies will have to appreciate markedly in the years ahead. U.S.:
140
Real Trade-Weighted Dollar (LS) Trade Balance/GDP (RS) Major Trading Partners*
120
100
80 130
Other Important Trading Partners
0 % 3
120
2
110
1
100
90 1975
1980
1985
1990
1995
2000
0 2005
* Includes Europe, Japan, Canada and Australia. Source: BCA Research
IS THE ECONOMIC EXPANSION MATURE?

Ken Mayland, president of ClearView Economics, says that based on his objective quantitative measures this economic expansion is far from mature and has plenty of room left to run. Expansion 1975-1980 1982-1990 1991-2000 2001-2004 GDP growth 23.20% 37% 37.70% 10.30% Prime rate* 8.50% 4.00% 1.75% 1.00% Jobless rate** -3.10% -5.80% -4.00% -0.80% Duration 58 mo. 92 mo. 120 mo. 36 mo.
Source: ClearView Economics, LLC
25
Markets continued
T-bonds: Waiting for the crash

BY JES BLACK
mid a crashing dollar, rising global equity markets and a rate hiking Fed, U.S. Treasury market yields adjusted for inflation are at the lowest levels in history. From a fundamental perspective the opportunity to short bonds could not be greater. The technical outlook confirms the bearish case. Bond prices broke below rising trendline support from the January 2000 lows this year sending bullish sentiment to a record low, according to MBH Commodity Advisors. In typical fashion, bond prices then rallied from the extreme level of pessimism to the same trendline before backing down.
10-YEAR NOTE CONTINUOUS CONTRACT
120
115
110
105
100
95 J O 00 A J O 01 A J O 02 A J O 03 A J O 04 A J O
Source: www.FxMoneyTrends.com
Despite the obvious implications of such a move, the Commitment of Traders report shows speculators amassed a larger net long position in the 10-year note during this years rally than at the previous price highs of June 2003 and May 2004. One explanation may be that as the yield curve flattened, the five-year note has led the way down this year allowing yield hungry traders to buy longer maturity bonds and sell the shorter maturity ones. But time is not on their side. Between 1990 and 2001 the gold-to-bond ratio had a correlation of more than 90% with yields. That is primarily because bond yields move inversely with price and because rising inflationary pressures also help drive yields higher. But this relationship broke down in 2001. As the gold-to-bond ratio has soared these past three years, the spread between the two has reached an all-time high. The implication, of course, is that yields must catch up to brewing inflationary pressures. Editors note: You can view these charts at www.fxmoneytrends.com/dx1.htm. Jes Black is president of FxMoneyTrends.com, a research service catering to hedge funds and professional traders.
the yen and has lost 35% against the euro since 2002. Unbelievable? Not hardly, if you consider the current $600 billion account deficit. The sliding dollar suggests that these foreign investors may have had their fill of dollar-denominated assets and might have lost their appetite for more or theyre growing concerned about our ability to repay the debt, says Dan ONeil, principal of Xpresstrade LLC. The dollar will be thrown into the abyss until we get the deficit and our fiscal house of cards in order, Charles Nedoss with Peaktradinggroup.com says. He adds, China and Russia are starting to spread money around. They are basically tired of financing U.S. debt and purchasing less US Treasuries, which is really kind of scary. The markets, of course, have reacted negatively to concerns that foreign banks might have reduced their holdings of American Treasury bonds. This includes reports that Russia and Indonesia are considering this move and reports that China already may have trimmed its purchasing. Keep in mind; China is the second largest holder of foreign exchange reserves. Mayland describes this situation as dollar indigestion. Foreign investors have to finance $600 billion of U.S. debt while the United States is absorbing $600 billion of the worlds saving. At some point there is going to be some indigestion, he says. However, Mayland expects the trend of the dollar falling to persist only moderately. You do hear some talk of a disorderly market, but I am not anticipating that this is a risk. I believe we will see a gradual ongoing retreat of the dollar, he says. But if the Chinese yuan is revalued this year as some predict, this revaluation may take a further toll on an already sliding dollar. I do believe the Chinese will revalue their currency in 2005, Zandi says. This pressure has been
26
there for sometime now for the Chinese to change their currency policy. I believe they will finally take the big step this year. Zandi predicts that a revaluation of the yuan will cause the dollar to fall another 5%-10% in 2005. Laidi believes early in the second half of 2005 China may raise interest rates as opposed to taking the step to revalue. However, he says raising interest rates again would give a more serious message by China about the potential for revaluation. Laidi says that if China can cool its economy with an interest rate hike, this could have a negative impact on metals, such as gold, leading ultimately to the dollar going up. Laidi, though, explains that in the long run an interest rate hike will pave the way for revaluation of the yuan, which could be a dollar negative.
LOOKING FOR A 2005 FX TRADE?

Some analyst and traders believe the dollar has gone as far as it needs to go against the euro and as a result selling the EUR/JPY cross rate is touted as a solid 2005 currency trade.
139.20 138.40 137.60 136.80 136.00 135.20 134.40 133.60 132.80 132.00 131.20 130.40 129.60 128.80 128.00 127.20 126.40 125.60 124.80 124.00 123.20 Dec
EURO/YEN (NEAREST FUTURES), WEEKLY

Nov 03
Source: CSI Unfair Advantage
Dec
Jan
Feb
Mar
Apr
May
Jun 04
Jul
Aug
Sep
Oct
Nov
27
Markets continued
Others, however, do not believe this issue will be a concern in 2005. If China revalues they will disclose a lot more problems, Nedoss says. The banking sector is not strong enough yet. I dont believe this will happen in 2005. A year from now I believe we will be having the same conversation, Nedoss says. Malpede explains, In 2005 we will move closer to having more flexibility in the Chinese currency and we will see currency appreciation in Asia overall, which will take some pressure off the dollar slide. He adds, It is the end of the line for aggressive dollar selling against Europe. I see a dollar-selling shift toward Asia. We have gone as far as we need to go against Europe. THE UPSIDE If there is something good to be found in this dollar slide, commodity traders point to the price of gold. In the last week of November gold futures closed above $450 per ounce
Tech Talk: More downside for the dollar
BY KATHY LIEN
he U.S. dollar has now been in a pronounced downtrend for more than two
U.S. Dollar Index (CASH), Monthly
0.000 (121.8)
120.00 115.00
years. Since the beginning of 2002, the dollar has fallen nearly 32% against the euro, 30% against the Swiss Franc, 25% against the British pound, 22% against the Japanese yen and 30% on a trade weighted basis. The dollar index is now at levels not seen since August 1995. A well-defined downtrend continues to remain the predominant theme in the dollar with the daily charts indicating that ADX is at 40, prices are well below the 200-day moving average, and MACD is in negative territory. The monthly chart of the dollar index also reflects a recent break of key support. Unless we see a move back above the November high of 85.70, bearish sentiment should continue to grapple the dollar. A more sustained close above 90 would negate the overall bearish outlook.
MACD (12,26,9,C) Directional Movement (14,14) Stochastic (14(1),3)
1.000 (80.22) 0.760 (90.0504) 0.500 (100.70) 0.236 (111.513)
110.00
0.382 (105.533)
105.00 100.00
0.618 (95.8667)
95.00 90.00 85.00 80.00 100 50 0 50 25 0 5 0 -5 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
As of Dec. 1, 2004 the EUR/USD was trading around its all-time highs of 1.3340. Momentum is bullish, with ADX at 56, moving averages all pointing upwards and MACD in positive territory. The high in the German mark against the dollar of 1.3430 was reached in March 1995. This is equivalent to 1.4560 in the Euro. With a near vertical 3-month rally, it would not be surprising to see a retracement in the EUR/USD. However such corrections will most likely be seen as opportunities to buy on dips towards 1.30, which represents the breakout point of the bullish triangle on the weekly charts. Similar outlooks are seen in the GBP/USD, USD/CHF and USD/JPY charts. ADX is well above the trending level of 20
in all three of the currency pairs, which suggests that the downtrend in the dollar should also continue against those majors. The GBP/USD closed above a double top and is trading at 12-year highs, with 1.95 and 2.00 beyond the strongest levels of resistance. USD/CHF and USD/JPY are both basing momentarily, but are also likely to continue on their downtrend as the descending channel pattern in both pairs remains intact for 2005. Kathy Lien is the chief strategist at FXCM. Reach her at www.dailyfx.com.
28
the highest since 1988. And since the beginning of 2004, the price of gold has risen more than 50%. Many traders are looking at $460 and then $500 as the next price targets, but given the markets rapid rise and lofty price, we think the next $20 move in gold could go either direction, ONeil says. Nedoss gold forecast, on the other hand, is clearly bullish. His initial target for gold was $475 and he believes gold will still hit this point. From there, Nedoss says, his next target is $502 and he says this precious metal can climb even significantly higher given that the dollar continues its steady descent. EQUITY RIDE OR SLIDE? We seem to know where the dollar is headed this year, but what about the stock market? Predictions for the 2005 market vary widely depending on whom you ask and what you read. Some say if the economy continues to perform well and the geopolitical environment improves a bit, this year and next the market could take off. Predictions of the market gaining more than 60% over the next two years can be found. However, in just one click or picking up the publication next to the one touting a bull, you may find a very different take. Opinions expressed here lean toward the bearish side. We expect the markets forward progress to be somewhat restrained stocks are trading at historically high valuation levels, and we still have concerns about the war in Iraq, terrorism fears, high energy prices and the possibility of rising inflation rates, ONeil says. Nedoss seems to agree. He says while the market has been able to shrug
numerous unhealthy fundamentals, including rising interest rates and higher energy costs, he does not see this holding true through 2005. He predicts moderate growth and points to less than fantastic earnings and lackluster auto sales as two of the culprits. For the stock market to sustain the levels we have seen we need more E in the P&E, Nedoss says. Zandi, another source for stock market forecasts, predicts a single digit return for the 2005 market. Sectors that Zandi suggests to stay away from include interest rates sensitive sectors, such as housing, house building supplies and mortgage finance. Broadly speaking I expect healthcare and educational services to continue to do reasonably well, Zandi says. Also globally oriented companies that export to Asia and those with large operations in Asia will do better in 2005. WHAT TO TRADE? Rising interest rates, a falling dollar, a focus on Asia...with this said, what trades might traders find appealing in 2005? Even though the euro has posted a string of record highs against the dollar, some industry sources, such as ONeil, point to the euro as a decent trade, explaining that it still has some momentum. Given the euros strong move to this point, if I were to initiate a new long position, Id certainly want the protection of a trailing stop. That way, if the market were to continue higher, my profits would be allowed to run, and the stop would trail behind. But if the euro was to make a sudden reversal and the market was to correct, Id have the protection of a stop order in place. Malpede, on the other hand, looks
For the STOCK market to sustain the LEVELS we have seen we NEED more E in the P&E.
Charles Nedoss, Peaktradinggroup.com
29
Markets continued
WILL CRUDE TELL ALL?
Oil prices, according to many analysts, is the 2005 wild card in determining just how much interest rates will rise and how far the stock market will climb.
56 54
CRUDE OIL (NEAREST FUTURES), WEEKLY
52 50 48 46 44 42 40 38 36 34 32 30 28
Oct
Nov 03
Dec
Jan
Feb
Mar
Apr
May
Jun 04
Jul
Aug
Sep
Oct
Nov
Source: CSI Unfair Advantage
may settle next year at an equilibrium price of around $38 to $40 a barrel, Mayland says. As for oils effect on interest rates, Laidi explains, The Federal Reserve is finally coming to terms with the notion that oil prices near $50 per barrel carry more of a negative impact on consumer demand than a positive impact on inflation. As a result, in November, Laidi wrote about his view that oil prices would be the key determinant of the Feds interest rate decision in December. According to Laidi, if oil prices revert to the low $40s through the first two weeks of December, then it would present an opportunity for a December rate hike on the rationale that lower oil prices are putting less restraint on inflation and growth. If on the other hand, prices remain at least in their high $40s, then the contractionary risk on growth remains apparent, thereby precluding the need for a December tightening. THE BIG PICTURE In the long run, knowing how analysts and other traders view the economy overall can be an important component to your trading strategy. And while opinions on the details differ, forecasts characterizing the entire year share some common themes. Our perspective is that the economy is gradually improving and gathering strength, thanks to a combination of lower taxes and interest rates. Hiring seems to have turned a corner, consumers are continuing to spend, and though corporate profits perhaps arent quite as robust as wed like, theyre moving in the right direction, ONeil says. We look for the economy to continue expanding in 2005 not explosive growth, but steady improvement. Laidi describes a similar forecast, stating that the overall economy will experience a moderate pace of recovery. He says he expects the stock market to continue growing cautious-
to Asia for currency trades. My preferred trade is selling the euro/yen cross, Malpede says. He says because of the overvalue of the euro and ongoing dollar slide, he predicts a move in the dollar/yen to a positive 96 and suggests buying yen. OILS PULL One common uncertainty found in 2005 economic forecasts, is the question of where oil prices will end up and how much of an impact they will have on interest rates, the stock market, and consumer-confidence for that matter the entire economic landscape. Analysts and traders concur that if they
had to predict where oil prices are due to stabilize this year, their best guess and many stress guess is the high $30s to low $40s. Zandi, who believes oil prices are key to just how well the 2005 economy will perform, says We will see oil prices by year-end at $35-$40 a barrel, but if oil jumps back up to $50 or above, the economy will be less upbeat and will experience a bit of a struggle. Mayland explains that because of the falling dollar, 2005 may be the year of the commodity. However, he looks at oil as a special commodity and does not believe that it will be part of this fundamental rise. Oil
ANALYSTS and traders CONCUR that if they had to PREDICT where OIL prices will stabilize this year their best GUESS is the HIGH $30s to low $40s.
30
ly, adding that the economys moderate pace could turn stronger if oil prices stabilize below $40. According to Zandi, 2005 will be a reasonably good year, characterized by solid growth, low inflation and generally low rates. He says while this years growth will not measure up to 2004, he expects to see the economy grow by 3.5%. Mayland labels this year as having above average growth. He also sees a 3.5% growth in 2005 and says the second half of the year will experience stronger growth than the first half. Mayland says in his view the fundamental question is whether this economic expansion is mature. His definition of mature includes the amount of GDP growth seen in this recovery, interest rate levels, the jobless rate and the length of the duration of this expansion. Mayland then compares how these factors stack up in past periods of economic expansion. (See, Is the economic expansion mature? page 25). According to Maylands object measure, this economic expansion hasnt reached its maturity. THE JOB FACTOR Sources point to job growth as reasoning for a positive economic outlook, but November job numbers did experience a setback. The nation created 112,000 jobs in November, a drastic drop from the 303,000 jobs added in October. Some analysts explain Octobers high numbers are mainly due to a burst of new jobs fueled by the need to rebuild the South from hurricane damage. Regardless, low job growth and low consumer confidence numbers Novembers figure fell to 90.5 from 92.9 remind us of what many analysts have predicted, the economy is set up for steady improvement, vs. rapid growth. FM Editors note: Visit www.futuresmag.com/ talk.asp to discuss this article with other traders.
Carla Cavaletti Bauch is a freelance writer in Chicago.

31
Markets continued
Europe and the euro: What goes up
BY STEVE ZWICK
o every yin, its yang, and to every yen, its euro or dollar, for that matter, since the surging euro and yen owe as much to the dollars decline as to any domestic strengths of their own. In fact, for the year ahead, most economists see the U.S. economy retaining its place as the global engine of economic growth, with even China dependent on what happens stateside. Still, currency traders are notorious for getting blindsided by issues in their non-native currencies, and no one in todays global economy is immune to being caught off-guard by predictable developments abroad. Even traders concentrated on domestic products are well-advised to keep an eye on developments in Europe. And while youre peeking, check out some of the new trading platforms that convert non-dollar-denominated markets into dollars in real time. They make it nearly as easy to trade European country and sector stock indexes as it is to do the domestic variety, and with half of the European Unions (E.U.) countries still using their old currencies, you can spread the euro against the Polish zloty, Hungarian forint, Czech koruna, Swedish crown, British pound, and a smattering of others on many FX platforms. On a macro policy level, this years E.U. expansion to 25 member states means 25 European commissioners in 2005. If they manage to get real clout, true reform wont be far behind for most of the newcomers are avowed free-marketers like new Commission President Jose Manuel Barroso. The new commissioner for Internal Markets and Services is the Celtic Tigers Charlie McCreevy, while the new Competition commissioner, Neelie Kroes, has sat on several boards and has long been an advocate of more accountable corporate governance. New Trade Commissioner Peter Mandelson has already made overtures towards easing the trade war between the U.S. and the E.U. As for projections, Price Waterhouse Coopers finds itself on the high end of consensus opinion by seeing overall E.U. growth at 2.25% in 2005, up from 1.75% in 2004, with Spain leading the pack at 3% and Germany bringing up the rear at 2%. Among the new member states, entrepreneurial Poland leads with 5%. Bank of America is less optimistic, projecting 1.7% for the whole of the Eurozone, but essentially agreeing on the relative performance of member states. The differences hinge primarily on two variables: oil and the dollar. Everyone we surveyed believes oil has topped out and the dollar will rebound in 2005, and at press time oil is in fact dropping precipitously. But the horizon is far from clear. The E.U. gets 40% of its oil from Russia, and most of that is channeled through one company, Gazprom which routes nearly
all of its E.U.-destined oil through turbulent Ukraine. And on the dollar front, a fear exists in Europe that if the Bush administration cant signal seriousness about reducing the triple deficits of budget, trade, and current account, then anyone holding U.S. debt carries a risk of being paid back in greatly depreciated dollars. Although Europes exports are more quality-driven than are Asias, such a fall would certainly whittle away at the E.U.s $80 billion trade surplus with the United States and take a toll on jobs. If, on the other hand, the U.S.-led global recovery manages to keep on chugging, Europe will doubly benefit due to its trade surplus and low inflation. ABN Amro economist Rolf Elgeti has identified 10 areas where schisms can open between expectation and reality, potentially launching major market moves. Primary among these, he believes, is labor reform, especially in Germany: For while most analysts see more disenchantment than enchantment coming out of Chancellor Schroeders efforts to whittle away at the welfare state, Elgeti himself a native of Germany sees real progress. Thats good news for the industrial sector, but bad news for consumer goods. So, how about spreading Eurexs Dow Jones EuroStoxx Industrial Goods & Services index futures against the Dow Jones EuroStoxx Retail index futures? Elgeti also points out that the various national indexes often reflect the industries within the countries so a country like Spain, which missed out on the go-go 1980s and early 1990s, is now benefiting from growth in construction and services. And remember the stability and growth pact? Thats the part of the Maastricht Treaty that puts a 3% of GDP cap on the budget deficits of member states a cap that Germany, France, and Italy, among others, have found difficult to remain below. E.U. finance ministers are meeting in January to consider more flexible fiscal rules. Might certain European countries thus find their bonds out of favor? And what of the euro? Public sector budgetary shortfalls could put a damper on the currencys rise, especially if low inflation keeps interest rates down there, while the Fed decides to jack things up a bit stateside. Although markets have so far shrugged off the leniency shown to Germany and France, Bank of America economist Lorenzo Codogno says that E.U. countries with high levels of government debt do end up paying a slight risk premium in the form of slightly higher yields on their government bonds. He warns this could blossom into greater differentials if the underlying problems are not corrected, and offers a warning to policymakers on both sides of the Atlantic: The effects of doubts about a country or economic areas creditworthiness become exponentialFM ly more severe as those doubts grow, he says.
32
Forex Trader
BY ABE COFNAS
Trend principles, tactics and new tools

the concept of trading at the edge comes into play. Trading at s 2005 gets underway, we are at extremes in the the edge is best understood as finding a probe of a key support currency markets. More specifically, the U.S. dollar has or resistance level. This requires some contrarian thinking. been in a long-term downtrend. The phrase the trend It is a natural tendency to try to buy when a price is going up is your friend has certainly shown itself to be a good mantra for or try to sell when it is going down, but there are retracements those who have sold into the extended dip. And while many and waves. Thus, if the currency pair is in a downtrend but is traders swear by it, we need to admit the obvious: The concept retracing to its five-minute trendline, a trader looking to sell of trading with the trend is too vague as a tactical tool. will watch for a probe of this trendline. Waiting for a retraceBeginning forex traders expectedly would follow-up that ment to support or resisadvice with a range of questance also reduces the risks tions. How specifically do BREAKING DOWN PRICE of being wrong because you trade with the trend? Three-line break charts can indicate trading opportunities on any time frame. stop losses can be placed Where are the entry rather tightly. points? When do you get Selecting the exit is one out? Are there principles to of the most challenging help the new trader trade problems. Getting out too with the trend? Can we early after initial profits build a strategic plan for feels good, but improving trend trading in forex? the average pip gain per A prelude to shaping a trade is key to long-term trend trading strategy in success. After all, trading is forex is to first review interhard work, and for the market conditions such as same level of effort, patterns in the U.S. dollar increasing the gains per index (USDX) and gold. trade is a legitimate goal. While each currency pair On the other side of the reflects specific trading of same coin is getting out to the dollar vs. that foreign Source: www.xtick.com prevent a serious loss. currency, the USDX is a Fortunately, a timequick measure of global proven charting method is accessible to help with every stage of sentiment. Assessing gold trends also provides a leading indicathe trend trading process: three-price or three-line break charts. tor of global sentiment toward the dollar. When gold is breakIn a three-line break chart, only the highs and lows are ing a previous sideways range or a downtrend, it offers a leading shown. If a new high is reached in a selected time frame, a new indicator of dollar sentient shifting. rectangle is added above, and if a new low is reached a new The next step is selecting the time frame. Trends can be rectangle is drawn below. We see that for the pound, there was monthly, weekly, daily and even at the tick level. By scanning a series of consecutive new highs with a few periods of reversals all of the time frames, you can quickly see the predominant in the accompanying weekly chart. The trend is up, but where trend direction. More important, countertrend waves can be and when do you enter that trade? The intra-hour trend identified. If the daily trend direction is diverging from the sequences helps us find a more precise location (see inset). weekly or monthly, new trading opportunities can be shaped. Looking at the 30-minute three-line break patterns, we see that The next step is selecting a predominant trading direction. the trend aligns with the weekly trend direction with some Finding a trade in either direction is always possible because reversals. This gives the trader the choice of entering into the forex prices are not linear and different laws of price action trend by buying after a reversal occurs or entering at any point come into play across time frames. By pre-selecting a direction but with a stop three lines below. to trade, based on fundamentals or longer-term technical analyIn 2005 trend trading offers opportunities, and with threesis, the focus becomes not what the trend is, but the best localine break charts the trend may become even more friendlier tion for your next trade. For example, those expecting a major to profits. downtrend in the dollar in 2005 will focus on the best entry points for short trades until that major expectation changes. Abe Cofnas is president of learn4x.com LLC. E-mail: learn4x@hotmail.com. Next, you need to focus on execution points. This is where
34
EQUITY TRADING TECHNIQUES

You dont have to be a computer whiz to trade todays electronic markets successfully. Heres a simple set-up for the E-mini markets that can provide significant profit opportunity if you can manage the risk.
Intraday setup for E-mini trading

BY ANDY MCCOMAS
here are numerous trading axioms that have been published ad nauseam take your losses...never trade ahead of a major report...dont average losers yet, traders who lack discipline consistently dont acknowledge these rules. However, just as critical is overlooking lesser-known rules followed by successful traders. One such guideline is the ability to enter a trade early based on its setup. Many day traders hail from technically oriented backgrounds that provide them with invaluable programming skills. The ability to write successful paper tradable systems is a luxury of systematic pundits. Discretionary traders are not so lucky. They must base their trades on innumerable market factors. Of these, most common are chart formations, the value of the current market, news events and time of day. For the discretionary trader, keen understanding of the noise a particular market exhibits is paramount to proper and timely execution. In both camps, though, one question invariably looms, which setup should be traded and, more important, when.
ENTER THE INDEXES Each market has its own characteristics that either suit traders or discourage them from participating. In futures, the more commonly traded markets the E-mini SP 500 and Nasdaq provide ample opportunity for traders to lose their money quickly. Non-systematic traders who consistently lose in these complex markets often share a common link: They never trade early on setups. Setups are action points that are calculated on time or price or as a combination thereof. Areas that call for a response by traders specific to pre-conceived buy and sell points compose setups. Chart formations, reaction trades based on time of day and intraday countertrend pullbacks create action points upon which traders react. The top chart in Only the average (right) shows the SP 500 jeopardizing the 200-day moving average (MA). The second chart shows the intraday picture of the buying that occurs after this action point is realized. The 200-day MA held, and the buying that occurred was heavy. In all action points, the trader must calculate ahead of time where he will
enter the market. Once decided, he must act upon it diligently. He cannot wait for follow-through; rather, he must be predictive as to where the market is headed. Any delay in the planned trade, and the trader risks chasing the market. Stock indexes are great markets in which to trade setups. When a market sets a new intraday high in the morning and then backs off that high into the lunch hour, this high then becomes a key number that may be retested later in the trading session. As the market finds value throughout the morning by meeting buy and sell points along the way, this directional process either continues by additional buying or it meets a short end by an increase in selling. What occurs during the noon break is generally a swing to both sides of the market as many participants are off-the-floor or away from their screens, thereby causing a deficiency in liquidity. Once those traders return, however, the story changes. Orders flow into the market from all over the world and attempt to set the tone for the remainder of the day. If that tone has been fairly bullish for
36
the majority of the morning, but yet a high had been set earlier in the day, this high then acts as a magnet to test further value as to how many sells or buy stop orders are above this high. Although this magnet effect seems to drag the market to it, often the market flirts with the high set earlier in the day but does not break it immediately. Here is the setup. The possibility of a break through the high most likely will not occur on the first try. More often, strong selling resistance at the morning high creates downward pressure on the market, thereby keeping the market below the intraday high. Rarely does a market break its high or low of the day on the first try. What was established as the high of the morning now offers a level of resistance that becomes difficult to penetrate upon first attempt. The setup is evident by virtue of the market desiring to trade higher and holding in the higher intraday range; however, it isnt quite ready to be penetrated. Many traders make this point far more difficult for themselves than it should be. Simply, if the market has traded toward the high of the day, it is for good reason. Buy orders are winning over sells, and this suggests the market can trade above the high set earlier. New market participants and existing longs looking to add positions have but one goal to push the market past previously recorded numbers. As with any set of cascading buy orders, there are an equal amount of sell orders until that balance becomes skewed. How is this measured and in what format? TIME AND SALES The time frame for which this setup may be violated must be counted in minutes rather than hours. A longer time frame in which a high or low is held represents lack of momentum, whereas a high or low broken within short order indicates increased momentum and follow through. This is helpful to the intraday trader. Penetration of a days high or low is
ONLY THE AVERAGE

An action point can be identified in any number of ways. Here, we use the 200-day M.A. S&P 500, DAILY
1170 1160 1150 1140 1130 1120 1110 1100 1090 1080 1070 1060 1050 1040 1030 1020 1010 1000 990 980 970 960
Either held or broken, this 200Day Moving Average creates an Action Point
Dec03
Jan04
Feb04
Mar04
Apr04
May04
Jun04
Daily
S&P 500, FIVE MINUTE
200-Day Moving Average holds, thereby amassing heavy buying

14:30 15:30 Wed 10:30 11:30 12:30 13:30 14:30 15:30 Thu 10:30 11:30 12:30
1103 1102 1101 1100 1099 1098 1097 1096 1095 1094 1093 1092 1091 1090 1089 1088 1087 1086 1085 1084 1083 1082 1081 1080 1079 1078 1077 1076 1075 1074 1073
5min
Source: FutureSource
primarily based on momentum, meaning if there is lack of heavy momentum then the high or low may stick. Since it is momentum that helps in the discovery process of new prices, one such way to help quantify momentum is to review time and sales records. Major quote vendors provide accurate time and sales records, which are helpful in determining a moves strength (a.k.a., momentum). Learning to read them properly helps
to identify a powerful signal traditionally reserved for floor traders. This signal or market noise defines the breadth of the move and subsequently indicates follow-through or exhaustion. In reference to the previous S&P 500 example, where the 1075 low was held, the time and sales record shows minimal prints in the 1075 range, suggesting the market cannot penetrate the 200-day M.A. (see Time to buy, page 38). The lack of prints between 1075
37
Equity Trading Techniques continued

This setup consists of the low acting as a magTIME TO BUY net to be taken out, but Analyzing the time-and-sales record indicates the 200-day M.A. is will most likely not be likely to hold at the 1075 level. taken out on the first or often not even the second attempt. Traders must be predictive or early when selling into a short-term rally. The traders conviction must be that if the low was tested once, then it will be tested again. Again, volume and general market breadth are helpful in determining whether the market has in it the potential momentum to take out the low. After a review of where other broader indexes are trading and, more important, at what time in the day this is occurring, then it may be argued that the low will not hold, and the trader may act accordingly and sell on the temporary bounce. Discretion plays the dominant role in this fast-paced style of tradMAGNETIC PERSONALITY ing. Bounces may be Drawing attention (page violent and coincide 40) shows how on April with another market 28, the June SP 500 making a move, such as futures contract set a low a currency or Treasury for the morning at bond closing imbal1122.30. For the remainance. Additionally, der of the morning and there may be a piece of throughout the noon perinews adversely affecting od, the market traded in a the general down see-saw fashion higher off Source: FutureSource nature of the market, in that low. After lunch, which case the low may however, traders began hold and not be broken at all. This, plete. The market traded at or near selling stocks and stock indexes. however, is the exception rather the low for a reason. Selling has domiThe 1122.30 morning low now acts than the rule. nated buying and the market direcas a magnet. It draws sell orders to it, A sell through the low of the day or tion indicated the market wanted to to find value or determine how many new buying above the days high cantrade lower. After the buying waned, contracts are bid below the low. The not be sustained without adequate the fifth five-minute bar broke first attempt at the mornings low was volume. Lack of volume slows through the low and provided the unsuccessful as bids held firm and momentum and causes the market to trader with the follow-through he pushed the market higher for another trade lower but uncertain of itself. needed to make this short successful. 25 minutes. Our setup was now comand 1076 indicates that selling momentum is waning and, subsequently, because the market does not trade heavily in the 1075 range, the market turns higher. A review of the time-and-sales record indicates lack of momentum as the most recent low is not broken. The important point to remember is the current markets proximity to the days high or low, as well as when in the day this discovery process occurs. The earlier in the day a market takes a stab at its high or low, the more this signal becomes suggestive of price continuation rather than magnetic price attraction. Magnetic price attraction is a value area of congestion, such as a stalled top or mid-morning bottom, that later in the same trading session acts dynamically to pull the market to it. This attraction is what lays the groundwork for the setup.
38
TRADE FUTURES
FOR AS LOW AS
Equity Trading Techniques continued

DRAWING ATTENTION
Here, the extreme price of the morning trading period acted like a magnet in the afternoon. When price finally broke through, shorts were successful. S&P 500, FIVE MINUTE
1130.50 1130.25 1130.00 1129.75 1129.50 1129.25 1129.00 1128.75 1128.50 1128.25 1128.00 1127.75 1127.50 1127.25 1127.00 1126.75 1126.50 1126.25 1126.00 1125.75 1125.50 1125.25 1125.00 1124.75 1124.50 1124.25 1124.00 1123.75 1123.50 1123.25 1123.00 1122.75 1122.50 1122.25 1122.00 1121.75 1121.50 1121.25 1121.00 1120.75 1120.50 1120.25
99
Direct Access to Futures Exchanges Advanced Trading Technology Feature Rich Trading Platforms
Second attempt at the low successful
1-800-779-1120
TRADE
WHERE THE ACTION IS!
www.gofutures.com
THERE IS A RISK OF LOSS IN FUTURES TRADING
Morning low
First attempt at the morning low

11:00
12:00
13:00
14:00
15:00
16:00
Uncertainty can spell trouble as the market can turn immediately, causing what looked like a legitimate setup to be unworthy and necessitate covering the position. Many times these moves are sudden and require not only quick entry but, equally important, quick exit. The quick and the poor (right) shows why an early entry and quick exit are necessary to capture profits. On May 5, Nasdaq 100 futures set an early to mid-morning high of 1434. (The 1435 high at 11:55 Eastern does not constitute a tradable new high as it was too late in the morning session to be considered as the true early to mid-morning high.) During the noon time period, the market traded lower until buyers came in to push the session higher from around 1 p.m. forward. Shortly after 2 p.m., the high was tested, but the test failed. The setup of a potential penetration of this high was now complete. If momentum increases, then generally this high will be broken with some
vigor. In this example, the momentum was lackluster, as the high of the early morning session was penetrated by around three full points. The trick to this style of trading is to be early after the high or low has held on the first attempt. In other words, if the high has held on the first attempt, buy the dip with the expectation the high will be exceeded prior to the close. Selling the low also applies. (Often, the low is exceeded with more exuberance than any high.) Patience and good money management are necessary as often the wait involved can be tedious. An arbitrary time limit of 35 minutes, or seven five-minute bars, can be used to validate the trade. Stop order placement should be based on each traders temperament and objective. That said, in experience, 3.50 S&P points or seven full Nasdaq points provide room for the market to work. INTRADAY PSYCHOLOGY Intraday support and resistance points
40
THE QUICK AND THE POOR

After the first attempt at the morning high, price quickly resumed the upturn. However, a trader would have had to have been quick to offset to garner significant profits. NASDAQ 100, FIVE MINUTE
Early to Mid morning high First attempt unsuccessful
1436.50 1436.00 1435.50 1435.00 1434.50 1434.00 1433.50 1433.00 1432.50 1432.00 1431.50 1431.00 1430.50 1430.00 1429.50 1429.00 1428.50 1428.00 1427.50 1427.00 1426.50 1426.00 1425.50 1425.00 1424.50 1424.00 1423.50 1423.00 1422.50 1422.00 1421.50 1421.00 1420.50 1420.00 1419.50 1419.00 1418.50 1418.00 1417.50
Early Buy in anticipation of break of high
10:00
11:00
12:00
13:00
14:00
15:00
16:00
are more temporal than permanent, as related to daily or even weekly charts. Once a set of numbers or a congestive area becomes picked at enough, odds increase that this number will be penetrated. How and why this penetration occurs isnt random again, refer to market valuation and where that value is perceived to be. Floor traders often refer to the market trading to where the largest numbers are, meaning that if buying support for the S&P 500 is large at a round number, such as 1100, then that price level acts as a magnet to pull the market to it. Arguably, buyers have sizeable orders to be filled on dips to 1100 and thereby give the off-the-floor trader the temporary feeling that support is to be held at 1100. Traders who watch how those numbers are hit and, more important, the frequency with which they are hit, are more often ready to sell on a short rally above the 1100 support mark with the expectation that this number will be penetrated. Again, accepting the importance of
being early substantiates the need for proper risk assessment in the event 1100 is not penetrated. Early setup trading is not for the faint of heart. This style of trading, like any, has complications. Many variables such as event news, light afternoon volume and counter-trend buying or selling may undermine the best setup and make it not worthy of real dollar risk. Traders who use clear discretion may help to mitigate risk by only entering early setup trades that occur late in the trading session. As most discretionary trading comprises multiple ingredients, adding a nonprogrammable systematic flavor such as late day setup trading, may give the trader the edge over others who ranFM domly trade at the market.
Andy McComas is a principal of American Futures & Options Inc. and American Diversified Funds Inc. based in Naples, Fla. He trades complex futures and option spread strategies for various retail and institutional clients. You may reach him via e-mail at indexbroker@earthlink.net.
41
TRADING TECHNIQUES
Think you know how to trade market breadth? Think again. Depending on your time frame, past strength may mean anything but future bullish follow-through.
Fade the breadth

BY LARRY CONNORS
ne of the trading aphorisms that many of us have been taught is that market breadth is important. Market breadth refers to the number of individual shares participating in a move in a broader index that includes those shares. Supposedly, when advancing issues are stronger than declining issues, the market is healthy and its a sign of likely further market gains. Conversely, when declining issues outnumber advancing issues, its a sign the market is breaking down and prices will be heading lower. Statistically, nothing is further from the truth. In our recently published book How Markets Really Work, we looked at a number of common indicators used by traders to help them time the market indexes. We looked at how markets reacted during one day, two days and one week when the S&P 500 cash market and the Nasdaq 100 cash market made 10-day highs, 10-day lows, multiple closes in the same direction, and multiple higher highs and lower lows. We also looked at how the market has behaved at extreme put/call ratio levels, extreme
Vix levels and large-volume days. We also looked at market breadth, asking a handful of questions: How did the market perform after advancing issues outnumbered declining issues a number of days in a row (again, supposedly a sign of market strength)? How did the market do after declining issues outnumbered advancing issues a number of days in a row (supposedly a sign of weakness)? How did the market do when advancing issues were 2:1 and 3:1 greater than declining issues for the day and how did the market do when declining issues outnumbered advancing issues by at least 2:1 and 3:1 for the day?
We looked at the market from 1996-2003. This period of time took into account a four-year bull run (1996-99), one of the worst bear markets in history (2000-02), followed by another year of higher prices in 2003. The results of this study will open your eyes, and will likely allow you to see potential edges that much of the financial media, along with many traders, do not understand. TRADING THE UNEXPECTED These results look at the market during a one-week period of time (meaning an exit five trading days after the signal). Multiple days of declining issues greater than advancing issues consistently performed better than multiple days of advancing issues outnumbering declining issues. This is not conventional thinking. Conventional wisdom states that markets are healthy when more issues are rising and not healthy when more issues are declining. But the results show that is not true. The weakness, as defined by declining issues has been consistently followed by strength, and the strength, as defined by advancing issues has been consistently followed
42
by weakness (see the top chart in Breadth of market, right). In spite of an upward bias during the period we looked at, the Nasdaq has actually lost money on average within a week after advancing issues outnumbered declining issues two days in a row. Think about this: A couple of good days and everyone wants to jump in. But, it is usually the wrong time to do so. The market has already risen and further gains on average have not been seen (see the middle chart). When advancing issues outnumber declining issues by a 2:1 margin (and everyone is on television telling you how healthy things are), the market has on average lost money during the next week. And, when declining issues have outnumbered advancing issues at least 2:1, not only is the world not coming to an end, the market on average has risen far beyond the average daily gain seen during that period of time (see the bottom chart). BUY WEAKNESS, SELL STRENGTH The statistics show that within the context of this study, it has been better to be buying when breadth has been poor and better to be selling when breadth has been good. The stock market does not go in one direction. Short-term strength usually does not follow through, as taught by others, and short-term weakness does not mean more short-term weakness. Not only is this logical otherwise the market would rise forever or drop to zero but, more important, the statistics prove this out. Using breadth indicators as described here gives you a potential edge that other traders dont see and allows you to enter and exit the markets at potentially more opportune times. FM
Larry Connors is the chairman and CEO of The Connors Group Inc. and TradingMarkets.com, a financial markets information company. He is also the Managing Partner of Connors Capital LLC, a private investment company. He has authored a number of top-selling books on market strategies and volatility trading.
BREADTH OF MARKET
Three consecutive days of declining issues greater than advancing issues have strongly outperformed three consecutive days of advancing issues greater than declining issues.
.60% .50% .40% .30% .20% .10% 0% Average One-Week Performance of the S&P 500 when NYSE Advancers are greater than NYSE Decliners for at least three days in a row. Average One-Week Performance of the S&P 500 when NYSE Advancers are less than NYSE Decliners for at least three days in a row. S&P 500 3 DAYS IN A ROW
Two days in a row of declining issues greater than advancing issues in the Nasdaq significantly outperformed two days in a row of advancing issues greater than declining issues.
1.00% .80% .60% .40% .20% 0% -.20% -.40% Average One-Week Performance of the Nasdaq 100 when Nasdaq Advancers are greater than Nasdaq Decliners for at least two days in a row. Average One-Week Performance of the Nasdaq 100 when Nasdaq Advancers are less than Nasdaq Decliners for at least two days in a row. NASDAQ 100 2 DAYS IN A ROW
Days with 2:1 declining issues to advancing issues outperformed days with 2:1 favoring the advancing issues.
1.20% 1.00% .80% .60% .40% .20% .0% -.20% Average One-Week Performance of the S&P 500 when NYSE Advancers are at least two times NYSE Decliners today. Average One-Week Performance of the S&P 500 when NYSE Decliners are at least two times NYSE Advancers today. S&P 500 2:1 RATIO
43
TRADING TECHNIQUES
Last year was all about the waiting. Is the wait over? We consult with the oats/notes spread to find out whats in store for the markets.
Open-ended questions for closed-minded people

BY HOWARD L. SIMONS Take it on faith, you take it to the heart Waiting is the hardest part Tom Petty The sun is the same in the relative way, but youre older And shorter of breath and one day closer to death Pink Floyd
n homage to the Vietnam-era poster, suppose they gave a market and nobody traded? We cannot say that universally about all markets in the year just departed; the energy market in particular decided to poke around the stratosphere, but the returns on conventional investments all hovered around the unchanged line for interminable periods. What is the best explanation for this flatlining, this languid torpor, this beat-your-head-against-thewall inaction? Waiting, thats what. We kept waiting: Waiting for the Fed, waiting for the political conventions, for the Olympics, for the election, for something. It got so bad that Godot himself could have strolled by and no one would have noticed.
What, if anything, could have alerted us to the possibility that our thumbs would have been safe and in a warm place for the better part of a cal-
endar year? This being January, there can be only one answer to that question, and that is the oats/notes spread, the very real difference between the front month contracts for oats and 10-year notes. The logic is impeccable: The lower interest rates go, the higher note prices go, and thus the lower the oats/notes spread. It has done nothing but provide us with clues to the inner workings of the market for the past decade, but like the dearly departed Rodney Dangerfield, it gets no respect.
44
Its breakaway gap to the downside in April 2003 alerted us to the arrival of a huge rally until the end of the year. But, then a funny thing happened: Despite the Federal Reserves series of rate hikes commencing in June 2004, note yields refused to go higher. No, they were reacting to the depressive effects of higher energy prices. The end result, and one there for all to see, was the one and only unfilled gap in the history of the oats/notes spread. Until this gap is filled, either by a huge rally in oats or a major sell-off in notes, financial markets will not move. OATS/NOTES TRADERS FOR TRUTH Of course, as effective as the oats/notes spread has been, it is unfair to ask it to shoulder the entire forecasting burden itself. It needs help. In previous years, we have offered measures as disparate as the HU/NG spread between gasoline and natural gas, the brass/ball spread between a synthetic London Metals Exchange brass forward and the stock of the Ball Corporation, and the DXY/CHX spread between the dollar index and Pilgrims Pride stock. But, as many of you noticed, 2004 was an election year, and an unnecessarily long one at that. President Bush was unchallenged for the Republican nomination, and John Kerry wrapped up the Democratic nod by early March. The two major parties then spent eight months and hundreds of millions of
WHAT RHYMES WITH GAP?

The financial markets are being held hostage by the oats/notes spread, which stubbornly refuses to fill a recent price gap.
290 240 The Only Unfilled Gap In Oats/Notes History
Weekly Oats/Notes Spread
190 140 90 40 -10 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
dollars to change what could have been a few thousand votes, although the actual tally might run into the hundreds. The only real excitement came in late August when the last battle of the aforementioned Vietnam War was fought over the American airwaves. When the oddly named Swift Boat Veterans For Truth emerged at the same time the extraordinarily steep
yield curve, one that defines the cost of carry in financial markets, began to flatten, the whole thing came together in a Eureka moment. The Swifties were driving the yield curve, its carry, and by extension the political fortunes of John Kerry. How so, you ask? We can measure the steepness of the yield curve by taking the ratio of forward rate between two and ten years, the rate at which we could lock in borrowing for eight years starting two years from now, to the 10-year rate itself. The lower the number, the flatter the yield curve; a number less than 1.00 indicates an inverted
45
Trading Techniques continued

SWIFT BOATS AND CARRY
Carry or Kerry, in 2004 your fortunes were tied closely to the performance of Swift/Boats.
1.15
TWOTEN Swift-Boat
$22 $20
[Forward Rate, 2-10 Years] / Ten-Year Rate
1.14
1.13 $16 1.12 $14 $12 $10 1.10 $8 1.09 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 $6
1.11
yield curve, one wherein short-term rates are greater than long-term rates. By the end of the Federal Reserves series of rate cuts between 2001 and 2003, this ratio was the highest it ever had been. The next part of our spread is the Swift-Boat indicator, which we can derive by multiplying the respective stock prices of Swift Transportation (ticker: SWFT) and Travis Boats (ticker: TRVS). Is the cost of carry related to swift boats? We report and you decide. THIS IS YOUR EXCHANGE ON DRUGS Stock markets, like elections, are sup-
posed to reward winners and punish losers, and they do this after a fashion. Lets revisit a spread introduced last year, the Merc/Merck spread between the Chicago Mercantile Exchange and the homonymous pharmaceutical giant. The Merc has rocketed forwarded since its December 2002 initial public offering, stepping on (or perhaps in would be a more appropriate preposition) its competition. By the end of October 2004, its stock had risen 86.75% since Euronext.liffe began offering a virtually identical Eurodollar contract in March 2004. Merck did not have a similarly good year; not only did all pharmaceutical stocks retreat under the threat of a Kerry presidency, but the firm had to withdraw Vioxx from the market. The Merc/Merck spread has been a one-way street. THE ABBY CNN closed its financial network. CNBC started running talk shows with old tennis players. The VIX hit new lows with regularity. Has money lost its sexiness? What happened to the stars of the 1990s, the ones
46
Swift Transportation x Travis Boats
$18
who managed to stay on the outside of Camp Cupcake? Fear not, for we keep the flame burning bright next to that $2.50 gasoline you have been buying. Yes, it is time once again to bestow this years Abby Award, the most prestigious non-existent prize in existence. If you want to win an Abby inscribed with Druid incantations and festooned with a symbolic broken clock for your skills at fearless forecasting and peerless prognostication, you actually have to do something right, which apparently is the highest hurdle in the business. It is on the order of the Boston Red Sox finally winning the World Series. Perhaps next years award should simply be the broadside of a barn with the words hit this painted on the sides. The contest is simple. Each week Bloomberg tracks the forecasts and asset allocation recommendations of Wall Streets leading strategists. We track the tracking. The weekly forecast for the year-end of 2004 was averaged and compared to the S&P 500s actual value at the end of September. The closest ratio to 100% takes the Abby, no questions answered, especially if they are about mistakes. The winner for this year is Francois Trahan of Bear Stearns. He joins this author, Ron McEwan, Chris Costakos, Beth Loeb & Darlene Demor, Douglas Cliggott and Abhijit Chakrabortti in the select company of Abby Award winners. What was Mr. Trahans secret? It was not sticking to his guns nor was
THE MERC/MERCK AT WORK

The Chicago Mercs relentless drive higher and Mercks Vioxx troubles made the Merc/Merck spread a one-way trade last year.
$22 $20 $18 $16 $14 $12 $10 $8 $6 Dec02 Mar03 Jun03 Sep03 Dec03 Mar04 Jun04 Sep04
GOOD ENOUGH FOR GOVT WORK

Some years in the markets, doing nothing or little is better than doing anything else. Last year was one of those years.
15% Circle No. 118 or go to www.oners.ims.ca/4545-118
Average Forecast / September Close
10%
5%
-5%
-10%
it changing his position frantically. Several strategists did not bother updating their forecasts at all during the course of the year; these included Thomas McManus of Banc of America, Subodh Kumar of CIBC and Abby Joseph Cohen of Goldman Sachs. Others adopted the weather vane approach. Trahan went from January through June with an S&P 500 forecast of 1160, dropped it to 1100 and then lowered it to 1050 for the last week of the contest. The net result was an average forecast error of 1.00%.
THE ABBY GOES SIDEWAYS There is a poetic justice to this outcome. Many of the most famous market gurus earned their bones by simply staying long during a bull market, or more rarely by staying short in a bear market and never varying their opinion. No matter how devoid of content their work was, the market bailed them out. This was the year when doing little and doing it quietly paid off in the markets. Do not expect this to continue. FM
Howard L. Simons is president of Rosewood Trading and a strategist for Bianco Research. E-mail: hsimons@aol.com.
Prudential Securities
Lehman Brothers
Merrill Lynch
Morgan Stanley
Goldman Sachs
Banc America
Bear Stearns
AG Edwards
Citigroup
JP Morgan
CIBC
UBS
0%

47
TRADING TECHNIQUES
Central banks have lost their ability to dictate trading ranges as they did in the 1980s, but their role in todays forex market is still significant. Heres what forex traders need to know.
Should forex traders battle the banks?

BY CORNELIUS LUCA
oreign exchange markets have come a long way since the dark days of the Bretton Woods Accord, which kept currencies chained to each other in a range of only 1%. In the past 30 odd years, the globalization of the economies, the technological breakthroughs and the staggering growth in investment funds and commodity trading advisors have expanded the daily trading volume in forex to $1.9 trillion dollars by 2004, according to the BIS Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity. If this figure were not impressive enough, remember that volume in forex has been greatly reduced by the melting of most individual European currencies, such as Deutsche mark and French franc, into the euro and by the incessant process of mergers and acquisitions, which reduced the number of commercial and investment banks considerably. Despite the markets rapid growth, the role of central banks in foreign currencies is significant, and it pays for traders to understand that role.
OCTOBER SURPRISE
The dollar/yens slide in October 1998 was unprecedented but it sparked no action on by the U.S. Fed or the Bank of Japan.
145
USD/JPY, weekly
140 135 130 125 120 115 110
Jul
Source: DealBook FX 2
Aug
22nd
Sep
Oct
24th
Nov
Dec
Central banks are involved in forex for a variety of reasons, such as payments. However, when it comes to foreign exchange, traders focus squarely on market interventions. Considering that central banks generally get involved in interventions only when specific currencies are at extreme highs or lows and that they use large amounts of money to control or manipulate, you may wonder if
these banks are driven by profit. However, while they tend to be successful only in the long term (as they typically lose in the short and medium terms), major central banks do not speculate in forex. Their trades are generally executed to restore orderly conditions in the market or to manipulate exchange rates away from extreme levels that have a negative impact on exporters.
48
HOW DOES IT WORK? In the United States, foreign exchange interventions are conducted by both the U.S. Treasury and the Federal Reserve. If the New York Fed buys dollars, then it means that it drains reserves; if it sells dollars, then it adds to reserves. The intervention is split equally between the Federal Reserve and the Treasury. Should there be minor differences, they will be reset at a later date. Typically, the Treasury pays for its portion in currencies from the socalled Exchange Stabilization Fund. In this case, the intervention will not impact the reserves. Only in the very unlikely case that the intervention is covered by sales of special drawing rights from the International Monetary Fund are reserves increased. The foreign exchange desk at the Federal Reserve Bank of New York executes the Feds currency interventions. There are two types of foreign exchange interventions: unsterilized (naked) and sterilized. An unsterilized or naked intervention consists only of foreign exchange. For instance, the Fed either buys or sells U.S. dollars against a foreign currency, such as the yen or euro. However, an intervention has a side effect thats unpopular among the major central bankers: in addition to the effect on foreign exchange rates, there is an additional monetary effect on the money supply. In this case, significant adjustments must be made in interest rates and prices and at all levels of the economy. Consequently, an unsterilized foreign exchange intervention has a long-term effect. This makes sterilized interventions the tool of choice, as they defuse their impact on the money supply. To achieve a neutral effect on the money supply, an additional step to the original currency transaction is needed: sales of government securities to offset the increase in reserves that the intervention creates. The impact of sterilized interventions tends to have a short- to medium-term effect, but in
YEN BENDS HIGHER

The Bank of Japan sold 32.9 trillion ($311 billion) in the fiscal year ending March 31, 2004, to weaken its currency.
120
USD/JPY, weekly
115
110
105
100 23rd Sep Oct 25th Nov Dec 28th 2004 Feb 29th Mar Apr May
BRINGING BACK THE BACON

The Bank of Japan bought the euro/yen in 2000 to help Japanese investors exit losing euro-denominated assets and repatriate capital to Japan.
135
EUR/JPY, weekly
125 120 115 110 105 100 95 90
1999
May
Aug
Nov
2000
Apr
Jul
Oct
Dec
2001
Jun
the world of foreign exchange, thats good enough. Interventions can have a negative impact on traders positions. Therefore, it is important to understand the reasons behind these interventions to both protect and take advantage of the opportunity. Central banks might intervene in the market to provide liquidity, protect certain levels, slow down trends and even reverse trends. This being said, dont expect a mechanical approach, where central banks will
automatically spring into action when certain conditions emerge. If a crisis affects a currency pair or several currency pairs, then the markets could become chaotic, either in terms of pure high volatility or with one of the sides of the price disappearing. In this case, a central bank might step in to supply the missing side of the market. However, there is no guarantee the bank will operate this way. If it does, then it means that the central banks task is only providing a safety exit to traders, not changing the direc-
49

BEGINNING OF THE DOWNTREND
The long-term joint central bank intervention following the Plaza Accord in 1985 was successful in devaluating the dollar.
250
USD/JPY, monthly
200
150
1984
Jul
1985
Jul
1986
Jul
1987
Jul
1988
Jul
SHORT-TERM REVERSAL
The dollar hit record lows against the yen and the other major currencies in the spring of 1995.
150
USD/JPY, monthly
140 130 120 110 100 90 80
Nov
1991
1992
1993
Nov
1994
1995
1996
Nov
1997
1998
tion of the market. Consequently, the impact will be short-lived. A classic example occurred in October 1998, when for two days, the dollar/yen collapsed nearly 11 per day, which was more than three times its previous largest one-day range. While unknown at the time, it was the doing of Long-Term Capital Management, which was in the midst of collapse. While mainly making its money (or, during this final chapter, losing it) in the interest rate markets, to offset some losses, the fund also liq-
uidated enormous amounts of long dollar/yen positions opened at below 100 several years earlier. The enormity of their sales and the small appetite to buy during those two fateful days created an unprecedented imbalance (see October surprise, page 48). However, those hoping to see central banks stepping in were sorely disappointed. Central banks may help, but they dont have to. Protecting certain levels has become a thing of the past, as central banks have lost their ability to dictate
trading ranges as they did in the 1980s. However, central banks might still defend certain levels. For instance, the Bank of Japan (BoJ) may be quite active in March, toward the end of the Japanese fiscal year, so its major exporters can either make more profit or fix their hedges at more convenient exchange rates. In the most extreme example, the BoJ sold an unprecedented 32.9 trillion (or bought $311 billion) in the fiscal year ending March 31, 2004, as foreign investors purchased a record amount of Japanese stocks, pushing the yen to a four-year high against the dollar (see Yen bends higher, page 49). Faced with the crude reality that they could not change the direction of the market, central banks may execute interventions to slow down the pace of the trend. When volatility accelerates, momentum funds tend to increase their positions, further fueling the movement. Central banks will then target the speed of movement, not the direction. For instance, a bank might buy small amounts at different times to slow down the downtrend. In this case, traders may take advantage of the intervention by selling at the end of the intervention and buying it back before the next. An interesting additional reason is that in extreme occasions, a central bank might intervene to help the local economy. Specifically, the BoJ, which is the most aggressive of the G7 central banks, bought euro/yen for months throughout 2000 to help Japanese investors who purchased significant euro-denominated assets after the introduction of the euro as they repatriated that money to Japan (see Bringing back the bacon, page 49). Not many central banks, if any, are ready and able to intervene and reverse trends. The typical mantra is that the foreign exchange markets should find their own equilibrium, which arguably is not the case during sharp trends. However, thats a good defensive position as forex markets are too large to be manipulated by one or even several central banks.
50
The best example is the Plaza Accord in September 1985, when the Fed led other central banks in a successful long-term effort to reverse the dollar uptrend and slow the widening of the trade deficit (see Beginning of the downtrend, left). But that was 19 years ago. By the spring 1995, the dollar reverted to record lows as its decadelong devaluation process was augmented by the Mexican financial crisis in late 1994 and by then new President Bill Clinton, who called for a stronger yen (see Short-term reversal, left). While the dollar hit the skids against all major currencies, its easier to measure the dollar/yen, which tends to move in clips of 20 in the long term. The dollar/yen collapsed from 100 to 80 before eventually recovering to 100, 120 and 140. That decline went out of hand and the subsequent process of rebalancing the dollar was slow, expensive and required special skill. In 1995, that skill was provided by Treasury Secretary Robert Rubin. THE NEXT MOVE Fast forward another (nearly) 10 years toward the end of 2004 and the beginning of 2005. Where is the dollar/yen now? Once again, on the brink of the abyss. The pair is very close to the 100 mark, and a move below this level will encourage another slide to the record low in the 80 area. Adding to the negative outlook is a long-term head-and-shoulders formation, which targets the 96 area (see Channeling weakness, above). The dollar is under structural selling pressure as both rising world power houses, such as China and Russia, and established G7 economies, such as the United Kingdom and even Fed Chairman Alan Greenspan, question the desire of foreign investors to continue financing the record U.S. deficits. Assuming that the G7 central banks actually want to intervene, and this is a big assumption, their impact will diminish by the day if the fundamental background doesnt change, namely if the
CHANNELING WEAKNESS
A long-term head-and-shoulders formation in the dollar/yen targets the 96 area.
135
USD/JPY, monthly
130 125 120 115 110 105 100
2000
Jul
2001
Jul
2002
Jul
2003
Jul
2004
Jul
EURO UNHINGED
The euro/dollar is overbought, at record highs and ripe for intervention.
1.30
EUR/USD, monthly
1.25 1.20 1.15 1.10 1.05 1.00 .95 .90
2002
Aug
Nov
2003
Apr
Jul
Oct
Dec
2004
Jun
Sep
Bush administration doesnt pledge to reduce the domestic deficits. Only this change would increase the odds for a strong joint G7 central bank intervention led by the Fed to strengthen the dollar. If not, the dollar will spiral downward for months. Once their hedges are surpassed, European and Japanese exporters will start suffering and voice complaints; but the U.S. deficits will see a reprieve. Technically, the dollar is oversold, so its due for a bullish correction. Take a look at the record-breaking euro/dollar on the weekly chart in Euro unhinged
(above). Every other time the euro/dollar was so overbought namely in June 2003 and February 2004 it came crashing down for about 11 weeks. At the end of 2004 the market shows similar conditions. Will the major central banks capitalize on the opportunity to slow down the dollar devaluation? FM Editors note: Visit www.futuresmag.com/ talk.asp to discuss this article with other traders.
Cornelius Luca is the currencies analyst for Global Forex Trading and the author of Trading in the Global Currency Markets (New York Institute of Finance).
51
TRADING TECHNIQUES
Traders should understand all viable means to exploiting market moves, and that includes selling options. For some traders in many market situations, short option positions might be the best way to trade the markets.
Setting the stage for option selling

BY TIM ZURICK
elling options can mystify new traders. Some of the factors that come into play are very different from conventional long or short trading. Buying a futures contract or option and selling at a higher price makes sense to most as does selling futures at a high price and buying it back at a lower price. Deciding what to buy or sell usually hinges on technical or fundamental analysis, or some combination of the two. Option sellers see opportunity in a different light. We sell the option and collect the premium for doing so. If the options become worthless, we get to keep the premium. Market direction, time and volatility decay can all drive down the premium (price) of an option. Waiting for options to lose their value is definitely not as exciting as predicting price direction, being right and reaping the benefits as the
market streaks in the predicted direction. But its also not as painful as being wrong about price direction. This month well contrast some factors to understand before you trade. The bottom line remains constant: we want to be short option premium. THREE CONFIGURATIONS A basic short option position is shown in Diagramming potential (right). This particular configuration is called a short strangle. Its short because the options are sold, and a strangle because the short call and put are said to choke the markets trading range.
When the market price is centered within the short strangle, the position is considered delta neutral. This means the deltas of the call and put cancel each other out. Such a delta neutral position makes or loses money at an approximately equal rate regardless of whether the market goes up or down. As the market does its thing, the options tend to lose value. Time decay happens. For an option seller, this is a good thing. A few points are apparent. First, if the futures contract expires in between the strikes sold, the seller keeps the premium from both sides. Second, it should be impossible to lose on both sides. (It isnt.) If the market skyrockets, driving up the price of the short call and creating a loss on that side, at least the short put will be profitable. Finally, the key to such a position would seem to be to find a market that will remain range-
52
bound, thus ensuring that the option strikes will be unchallenged and expire worthless. As is often the case with options, appearances can be misleading. Predicting that a market will remain within a given range is no easier than predicting it will go up or down. It really is not important that the market stay inside our sold strikes. While maximum profit is achieved within the strikes, overall profit is merely diminished as the price violates the strikes. So the real key is to know what to do when that happens. The next position, the short straddle, is really just a very tight short strangle (again, see Diagramming potential). A call and put are sold just as in a strangle but they are sold at the money. There is no gap of happiness within which the futures can expire so that the seller keeps all premium sold. The last, and most basic position is the naked sale of a call or put. This is not a delta-neutral position. If we sell an out-of-the-money put and the market drops, we will tend to lose faster than time decay can bail us out. So a naked short put has a bullish bias it will make money faster if the market rises. Depending on the delta of the option sold, such a position behaves more like a mini futures contract than a long option. And because there are no protective profits if the market moves against the position, dont try this at home just yet anyhow. BREAKEVENS Short options have a specific breakeven point at expiration. If you sell a $450 gold call for 800 points (8.00 or $800 cash), the breakeven is the strike price plus the premium sold, or $458. If you also sell a $400 put for another 800 points your overall breakeven on the high side is $466 ($458 + 8). This is significant because most new option sellers have a fear of the strike they tend to panic if the price of gold exceeds the 450 call strike. In fact, there is no immediate significance if
DIAGRAMMING POTENTIAL
The range of potential profits at expiration on sold options is wider than the sold strikes. It varies depending on the type of short option strategy you employ.
140
120 Sell call
100
80
60 Sell put 40
20 140
120
100
80
Sell call and put
60
40
20 140
120
100
80
60 Sell put 40
20
53

HOW THEY COMPARE
Note that the delta of options, either long or short, is subject to change.
FUTURES RISK REWARD SPEED OF RISK (DELTA) TIME DECAY MARGIN RISK CONTROL Unlimited Unlimited Fast None High Stop LONG OPTIONS Limited Unlimited Slow Hurts None Spread SHORT OPTIONS Unlimited Limited Slow Helps Lower (vs. futures) Spread
some detail on estimating margin requirements for a short option position. Futures positions are typically protected with stops which offer no protection whatsoever when the market is closed. Options, especially short options, are normally protected not by stops, but by spreading other options against them. Such protection profit from a secondary position to protect a primary position does function when the market isnt open. And while such protective profits wont completely compensate for large losses, they can be a big help until the market does open. LOCK AND LOAD Having mulled the above factors and mentally mastered them, were now ready to ask the next big question what to trade? Our number one screen is liquidity. You do not want to trade illiquid markets. Years ago, I persisted in annoying an experienced broker with questions about platinum options. He rolled his eyes and ignored me. What he knew, that I didnt, was that there really was no market in platinum options still isnt. While they may be authorized for trade and the exchange certainly wants us to trade them, the fact remains that there is no liquidity in platinum options. The point here isnt to pick on the New York Mercantile Exchange all exchanges have their share of quasiviable contracts and illiquid options but illiquidity means bad fills. We are traders, not pioneers. There are enough liquid option markets in which you can obtain quality fills that you shouldnt participate in illiquid ones. Next month well look at specific indicators of liquidity and which markets are worth our hard-earned trading dollars. If you have any questions or want to share any horror stories about option selling, they are welcomed at tzurick@sstfutures.com. FM
Tim Zurick has been selling options for more than 10 years. He is a manager at Silver State Trading (www.sstfutures.com), a futures brokerage firm in Las Vegas, Nev. Tim is also a registered CTA and principal of Zurick Trading Group.
the market exceeds your call strike or falls below your put. At expiration, your profits are reduced by the in-themoney amount, but prior to then its important to know just how wide your breakeven range really is. Its wider than the strikes sold. SIMILARITIES AND DIFFERENCES A short option is unique. In some respects, its similar to a long option. But in others it behaves more like a futures contract (or a mini futures contract). The table How they compare (above) summarizes these differences. The risk in buying an option is limited to the premium paid for it. And while that premium frequently disappears, that is the most you can lose. For futures and short options, there is no limit to the potential loss. As long as the market moves against your position, losses can continue to mount. However, the short option does have two advantages over a futures contract. First, it will only rarely be affected by a limit move so the danger of being trapped in a locked limit situation for days on end is remote and the option can be bought back at any time. Second, option premiums change at a slower speed than futures and that slows the rate of potential loss. The maximum potential profit for a short option is the value of the premium sold. This is the factor traders find most objectionable: limited reward for potentially unlimited loss. But in fact, any short option that does reaches its maximum profit near zero can
be bought back and rolled to a different strike to create more profit potential. Futures and long options both carry the potential for unlimited profit without rolling. Both long and short options move at a slower pace than the futures on which they are based. This relationship between the futures and the resulting options price is called delta, and is expressed as a percentage. Most traders consider this slower price change a key advantage for options flexibility in the form of staying power. Adverse price moves that might stop out a futures position often can be easily absorbed by an option. Over time, options tend to lose their value. This is because options buyers become less willing to pay as much for the diminishing chance of the option expiring with real value, or in the money. If youve purchased options and watched them melt like an ice cube in the sun, youre probably familiar with the concept. While option values can be diminished by other factors, time decay remains the major advantage to option sellers. Short options, unlike long options, require posting of margin just like for a futures contract. The reason for this is that if the market moves against a short option position, it is possible to be assigned a losing futures position and the futures contracts theoretically unlimited potential for further loss. A long option that goes badly simply expires worthless and dies no margin necessary. Next month well go into
54
Trends In Futures provides traders with insightful market commentary and specific trade recommendations. Editor, Noble DraKoln, is a full-time trader, licensed futures professional and author. With Trends In Futures youll improve your ability to spot market moves with greater accuracy, build confidence in your trading decisions and improve your results.
A product of Futures Magazine Group. There is a risk of loss in futures trading. Past results are not necessarily indicative of future results.
FUTURES 101
If you need a trading tool to complement your primary indicator, these market measurers may be what youre seeking.
Oscillators explained
BY YESENIA SALCEDO
eing a trader, and not a fortune teller, you have no idea what the markets you trade are going to do exactly, which is why you use indicators to help you narrow down your projections of what could happen after you place your trade. Oscillators are one group of indicators that can be a critical part of your trading plan, as most traders use them as a secondary confirmation tool to help better define where a market will move next. "Generally, the use of the momentum indicator can often warn of latent strength or weakness in the indicator or price being monitored, often well ahead of the eventual and final turning point," says Themistoklis G. Kikis, an account manager at GreekShares.com, an educational Web site on the financial markets. Oscillators help find turning points in trending and range-bound markets and usually are leading indicators. They often turn prior to prices changing direction and help a trader time trade entry and exit points by identifying overbought and oversold market extremes. An overbought condition exists when an oscilla-
tor reaches a high level associated with past highs in price, and an oversold condition is when an oscillator reaches low levels associated with past lows in price, according to Chuck LeBeau, a system developer who operates the System Traders Club (www.traderclub.com). Oscillators, also called momentum indicators, are basic measures of how strong a market move is and, in most cases, in what general direction the market is heading. A strong uptrend shows high readings and a strong downtrend shows low readings; middle readings signal weak trends and a possible reversal or correction. Oscillators are typically graphed on a separate chart below price and an equilibrium level indicating a neutral reading is displayed as the x axis. An oscil-
lator value above the equilibrium line thats increasing means the market is in an uptrend gaining strength and values below the equilibrium show the market is in a downtrend. In this article well cover the five most popular oscillators: Moving average convergence/divergence (MACD), momentum, the relative strength index (RSI), rate of change (ROC) and stochastics. While most oscillators based on similar time periods may look alike, they have their differences. MACD Moving average convergence/divergence is a smoothed, unbound oscillator thats made up of two lines: A solid line called the MACD and a dashed line called a signal line. The MACD line consists of two exponential moving averages (EMA): A 12-period EMA of closing prices and a 26period EMA of closing prices. The difference between these two calculations is the MACD line, which is usually drawn as a solid line and is sometimes called the fast line. The signal line is the MACD line smoothed by a nine-day EMA. The signal line is also called the slow line, and is plotted as a dotted line.
56
Reproduction or use of the text or pictorial content in any man-
The two EMAs will tend to cross over each other from time to time, signaling buy and sell action, says Shaun Taylor, president of Phase II Consultants Inc. The best signals come with the fast line crossing the slow line. A buy signal occurs when the fast line crosses below the slow line and a sell signal occurs when it crosses above the slow line. It is clearly understood that crossovers will signal the beginning and the end of both uptrends and downtrends. The center line of the MACD is key to the strength of this indicator. Adds Kikis: Unfortunately, MACDs main problem would be that it is a lagging indicator. Therefore, there exists some lag in the indicator itself. This is more likely to be the case with weekly charts than with daily charts. However, Kikis says he chooses to use the MACD because it incorporates aspects of both momentum and trend analysis in one indicator. Being a trend-following indicator, it will not be wrong for very long, he says. The use of moving averages ensures that the indicator will eventually follow the movements of the underlying security, and by using exponential moving averages, as opposed to simple moving averages, some of the lag has been taken out. RSI The relative strength index allows for the analysis of overbought/oversold conditions. It is one of the most popular indicators for monitoring divergence. Divergence occurs when the trend of a securitys price does not correspond with the trend of an indicator. Divergences are sometimes used to forecast a top or a bottom. RSI attempts to estimate the markets current strength or weakness depending on where prices close during a given period. This assessment is based on the assumption that higher closes indicate strong markets while lower closes indicate weaker markets. Usually, you can expect price bottoms
LONG RUN DOWN

On this 2004 gold chart, the MACD indicator showed the trend would change in late February, when the fast line, called the MACD line (blue), crossed the slow line (red) going downward. In early June, at the end of that downtrend, a buy signal was given when the blue line crossed above the red line.
(C,CG,D) Dynamic, 0:00-24:00 (Delayed)
30.00
27.50
25.00
22.50
MACD(12,26,9,C)
0.960 0.009
18 22 5 20 2 9 17 18 22 5 19 3 17 17 21 6 19 29 23 7 20 4 18 18 15 Dec 2004 Feb Mar Apr May Jun Jul Aug Sep Oct Nov
Source: eSignal
when the index reading drops below 30 and price tops when it moves above 70. RSI is calculated as follows:
RSI = 100 - (100 / (1 + RS)), where RS = average of the days closing higher during the interval divided by the average of the days closing lower during the interval.
overbought/oversold indicator tells whether prices are rising or falling and at what rate. A momentum number is obtained simply by subtracing a past price from the most recent price over a consistent period of time. The calculation of the momentum indicator is relatively simple. It compares the current periods price to the price of a selected previous time period. Specifically:
M = Pc - Pn where M = momentum Pc = current periods price Pn = price n periods ago.
The RSI indicator is plotted on a vertical scale. It is a bound oscillator with readings restricted to values between zero and 100. When the reading of the indicator surpasses 70, an overbought condition exists. An oversold condition exists with readings below 30, although different traders are known to use different overbought/oversold levels for different markets. RSI works best as an overbought/oversold indicator in trading range markets and as a divergence indicator in other types of markets. A 14-day interval is typically used for the interval input. MOMENTUM Momentum measures the change in a commoditys price over time. This
The time length is important with momentum. The length of time used should match the cycle of the market under analysis. The value is a matter of personal preference and time horizon of the trader. A narrow window of fewer than five periods would be short-term in nature, while six to nine periods would be considered intermediate and 10 or more would be a longer time perspective. The most common value is 10 periods. The focus is on the zero line, not the
57
Futures 101 continued

OVERBOUGHT EXTREMES
In this 2004 crude oil chart, the relative strength index indicated that the price of crude was extremely overbought when it neared the $60 range late April by showing a high RSI reading. Overbought conditions were also indicated by high RSI readings near 100 in late June when prices neared $60 again, and in early September when prices were below $55 and in mid-November when prices were just below $50. This suggests the price of crude is still too high and may come down eventually.
(C,CL,D) Dynamic, 0:00-24:00 (Delayed)
60.00
calculation, the %K line and the %D line. The %K line is:

%K = C - Ln / Hn - Ln * 100, where C = closing price of current period Ln = lowest low during n periods Hn = highest high during n periods
55.00
50.00
The %D value is derived from the %K value. Heres the formula:

%D = 100 * (Hn / Ln), where Hn = the n period sum of (C - Ln) in the %K formula and Ln = the sum period of (Hn - Ln) in the %K formula.
45.00
RSI(14,C)
100
0 20 Feb 2 9 17 18 22 5 19 3 17 17 21 6 19 2 9 23 7 20 4 18 18 15 Mar Apr May Jun Jul Aug Sep Oct Nov
Source: eSignal
upper or lower zones. Crossing this line indicates an overbought/oversold condition may exist. Momentum is positive if todays price is higher than the past periods price and negative if not. The general rule is to buy when the indicator passes up through the centerline and sell when it passes down through the center line. RATE OF CHANGE This is another indicator that measures both price direction and speed. ROC is similar to momentum, but does have key differences. ROC has a horizontal median called equilibrium and this median tells us everything we need to know about ROC, Taylor says. The normal time frame for ROC measurement is 10 days. The formula for the ROC indicator is:
ROC = 100 (Y / Yn), where Y = most recent closing price Yn = closing price n days ago.
of change value will be above the equilibrium, thus indicating to chartists that prices are rising, Taylor says. Conversely, if the price in todays session closes lower than it did 10 trading days ago, the value point will be below the equilibrium, indicating that prices are falling off. It is safe to say that if the ROC is rising, it gives a short-term bullish signal, and a bearish signal would have the rate of change falling. Taylor says long-term views of the market will use a 26- to 52-week time period for n and a shorter view would use 10 days to six months. STOCHASTICS The stochastics indicator measures the relative position of the closing price within a given time interval. This indicator is based upon the premise that prices close near the upper portion of a trading range during uptrends and near the lower portion of a trading range during downtrends. When prices close in the middle of the range, it suggests a sideways market. There are two components to this
These formulas produce two lines that oscillate between a scale of 0% and 100%. As with other oscillators, a value below 30% suggests an oversold condition while a value greater than 70% suggests an overbought condition. Here, a buy signal would be triggered when the fast line crosses the slow one and both are rising while still below 30%. BEWARE FALSE SIGNALS The basics behind oscillators such as RSI and stochastics, which use high level markers to indicate buys and low level markers to indicate sells, work well in non-trending markets by indicating many profitable signals, but you must be wary of using them in trending markets. LeBeau says strict interpretations of overbought- and oversold-type indicators that focus on buying when the indicator shows the market is overbought and selling when the oscillators shows the market is oversold can be dangerous and can wipe you out. Those interpretations of the indicators works pretty well when the market is range-bound, and more or less going sideways within a welldefined trading range, but problems arise, however, whenever the market starts to trend, LeBeau says.
If the price of a stock closes higher today than it did 10 days ago, the rate
58
SIMILAR INDICATORS
In an uptrending market, for example, the RSI and stochastic indicators will both rise to the top of their boundaries and give continuous indications that the market is [overbought and] about to change direction, but the market doesnt change direction because there is a trend in place, LeBeau says. These indicators are continuously trying to initiate trades in the direction opposite of the trend. LeBeau says the way he gets around that problem is by combining oscillators with the average directional index (ADX). The ADX measures the strength of a prevailing trend. A high ADX value indicates a strong trend, either up or down, and a low ADX value indicates a weak trend. I find that when the ADX is rising, signals from oscillators such as RSI and stochastics can be expected to give a lot of false signals and should probably be ignored or used in a trend-following fashion rather than the original countertrend strategy they would normally be used for, LeBeau says. When the ADX is declining, it indicates the market is range-bound and not trending, and under that circumstance the overbought/oversold indicators would be expected to be quite accurate and probably very profitable. FOLLOWING OSCILLATORS Thats not to say that these oscillators cannot be used in a trending market. [Oscillators] can be used in a trending market, Lebeau says, but you have to ignore the traditional boundaries of 70/30 or 80/20 because in a trending market they dont make equal excursions to both sides. In a rising market environment its quite easy for the RSI and stochastics to get up to the top of their range, but the moves downward do not go an equivalent distance. Say we get to 80 on the high side. We would expect to go down to 20 on the low side, but if the market is in an upward trend its quite easy to get to 80, ROC and momentum are similar indicators. Both can tell us whether prices are rising or falling at an increasing rate. Here, in this daily corn chart, you can see both indicated the same buying opportunities when each indicator passed above the zero line, and both indicators signaled the same selling opportunities when each passed down through the zero line.
(C,C,D) Dynamic, 0:00-24:00 (Delayed)
55.00
50.00
45.00
ROC(10,C)
40.00 0
Momentum(10,C)
0 5 12 19 26 3 10 17 245 1 7 14 21 28 6 12 19 26 2 9 16 23 30 7 13 20 27 4 11 18 25 1 8 15 Apr May Jun Jul Aug Sep Oct Nov
Source: eSignal
STOCHASTICS CALLED IT
On July 12, 2004, a buy signal was triggered when the %K line (blue) crossed up over the %D line (red), while both lines were facing upward and under the 30% level. This told us the S&P was oversold and the trend was about to turn up. Then in early October, the %K line crossed below the %D line while both lines were facing down and above the 70% level, showing the S&P was overbought and the trend was about to turn down.
(C,SP,D) Dynamic, 0:00-24:00 (Delayed)
12.00 11.00 10.00 9.00
Stochastic(14[1],3)
100 50 0
5 12 19 26 3 10 17 245 1 7 14 21 28 6 12 19 26 2 9 16 23 30 7 13 20 27 4 11 18 25 1 8 15 Apr May Jun Jul Aug Sep Oct Nov

Source: eSignal
but the dips, or the movements against the trend, do not go an equal distance in the opposite direction. If they did there really wouldnt be a trend.
As with any tool used for trading, you should not rely solely on oscillators. Oscillators should be used secondary to your primary trading tool. FM
59
MANAGED MONEY
The fee structures for various managed futures products can vary greatly. While brokerage fees have been dropping dramatically, there are often several layers of fee takers involved before an end user sees profits. Before investing, its important to know how much you are paying and for what service.
How much are you paying?

he way managed futures funds are structured can lead to confusion over what an investor is paying and to whom. While many commodity trading advisors (CTA) have a straightforward fee structure usually involving a management fee of 1% to 2% and an incentive fee of 20% (more or less), when working in brokerage costs and how distributors of a managed futures program are compensated, it can get muddled. One basic widespread model keeps it simple. Third party marketers will work out a fee-sharing arrangement with a CTA typically 20% of the CTAs management and incentive fee allowing investors to know they are not being charged anything additional on the brokerage side. Another model has introducing brokers bringing investors to the CTA. IBs will get a portion of the brokerage commission. Typically they will charge the end user an all-in brokerage and clearing charge and negotiate with the futures commission merchant (FCM) what the FCM charges and keep the difference.
The problem with this model is that once an investor selects a CTA, most of the work an IB performs is done but they will continually get trail commissions. Though some argue that IBs provide ongoing service, the CTA makes all the trading decisions and enters orders directly to the FCM, so whatever the IB does to service the account after that point is not necessary for the execution of the program. They are not involved in the execution of the trade. They are not involved in order entry. The order goes straight from the CTA to the clearing firm, says David Matteson, partner at Gardner Carton and Douglas LLP. Melinda Schramm, chairman of the National Introducing Brokers Association (NIBA), argues that the IB is the point of contact person for customers and services accounts even if they are making no trading decisions. Other structures can include a load fee or IB management fee but these structures are rare. The load fee, which is much more prevalent in traditional investment products, is not subtracted
from the performance numbers. Occasionally, there is a CTA that shares in commissions, but that is rare, says Carol Dannenhauer, director of managed accounts at Lind Waldock. An IB that is also a commodity pool operator (CPO) often charges the IBs own pool a roundturn rate greater than what the FCM charges, creating an additional revenue stream. Institutional investors understand the cost of trading and wont pay any additional charges. Brad Cole, president of third party marketing firm Cole Partners, says that 20 years ago large institutional investors would routinely pay $20 a roundturn including all fees for execution of a managed futures program. That level is now south of $10, according to Cole. Commission compression has been democratic allowing investors in retail-sized programs to get what 10 years ago would be a good institutional rate. Matthew Weingardt, principal at CTA Amen Asset Management, which has a $25,000 minimum, will allow IBs bringing investors into his program to
60
charge a $15 roundturn but prefers investors get the clearing brokers best rate and to offer a percentage of his management and incentive fee to third parties bringing investors into his program. Amen receives low rates because it is a high-velocity trader more than 12,000 roundturns per million under management but most small CTAs can negotiate low rates if they shop around. Dannenhauer says that the roundturn rates investors of managers offered through Lind vary from $8 to $30 depending on the program. She says the average is below $20. Amen notwithstanding, where there is flexibility in terms of fees is in programs that cater toward the retail-level investor or CPOs that allow lower minimum investments. Institutional investors and high net worth individuals tend to have established brokerage arrangements. They also tend to select their investments and have no need to pay a downstream distributor. Institutions will work with third-party marketers, but they predominantly work on a percentage of CTA management and incentive fees. BEWARE, THE REGULATOR! Matteson, who specializes in futures practices, believes it is time for the industry to take a critical look at its fee practices. With the SEC and Eliot Spitzer examining fee structures within the mutual fund and insurance industries, it could be time for a little house cleaning in managed futures, he notes. Matteson says fee structure played a part in the inquiries into both the mutual fund and insurance industries. Our industry could learn from that and get ahead of the curve, Matteson says. I am not saying that we need to get rid of fees. Let the free market decide what fees are appropriate or not. I am just saying, call the fee what it is and accurately disclose who is receiving the fee for what service. Matteson says it is getting increasingly more awkward when you are paying someone, in essence, for money raising but you call it a brokerage commission
HEADS I WIN, TAILS YOU LOSE

Commission charge options by a Vision IB:
Fee Structure Option (A) I hereby acknowledge that my managed account traded by ACE Investment Strategists, LLC is to be charged a round turn trade transaction cost of $55.00, inclusive of all commissions and fees. I am aware that these fees will be deducted from my account on initiation of each trade. I am also aware that a $20.00 monthly accounting fee will be charged to my account at the end of each month. I am aware, further, before the CTA is eligible to earn any incentive or management fees, all monthly, round turn commissions (including fees), CTA management fee and accounting fees, must first be recovered. Fee Structure Option (B) I hereby acknowledge that my managed account traded by ACE Investment Strategists, LLC is to be charged a commission of 0.83% based on the month-ending account net asset value and a roundturn trade transaction cost of $21.00 inclusive of all commissions and fees. I acknowledge that the 0.83% is to be deducted from my account on the first day of the succeeding month and that payment is to be made to ___ , the introducing broker servicing my account. I am aware that a $20.00 monthly accounting fee will be charged to my account at the end of each month. I am further aware before the CTA is eligible to earn any incentive fees, all monthly, round turn commissions (including fees), CTA management fee and accounting fees charged to my account, must first be recovered.
or brokerage service fee. He notes that current practice is legal. My issue is that if you look at mutual funds and now the insurance industry, there is greater regulatory scrutiny over compensation arrangements. In other industries, we have seen where the ultimate consumers dont know who is being paid for what service. There is compensation sharing that is going on and they dont know what its for. That underlies a lot of current regulatory actions taking place, he says. DISCLOSURE The futures industry has benefited and suffered from a maverick reputation. The rule on fees has always been a basic market test but everything has to be disclosed. The National Futures Association and Commodity Futures Trading Commission shy away from getting too involved in what fees are charged. The watchword has always been disclosure. A manager is entitled to charge what the market will bear, but those fees must be fully disclosed. Is it sufficient disclosure to disclose that the roundturn rate is $100 or in
order to satisfy your disclosure obligations should you also disclose that $100 is substantially in excess of the roundturn charged by other CTAs or other FCMs? asks Matteson. NFA President Daniel Roth says that in som settings full disclosure can mean more than simply providing a laundry list of all the applicable fees. We have always taken the position that in certain circumstances full disclosure of fees has to go beyond a mere recitation of what the fees are and could include a requirement to provide the customer with a breakeven analysis to show the customer the total impact of all the fees that he is being charged and the return a customer would have to achieve to break even in the first year, Roth says. One instance in which the higher standard could be applied is in cases where a load fee is charged by an IB, according to Roth. In that case the CTAs performance numbers would not reflect the load charge and a breakeven analysis would be more useful. VISION Justin Boshnack, SVP of Vision LP,
61
Managed Money continued

BREAKEVEN
Public funds and private pools are required to provide a breakeven analysis that gauges how much the fund must earn to offset all of the cost to the client. The NFA can require some private placements to provide this analysis. and good clearing for between $10 and $15 all in a roundturn, says Keith Perry, SVP of Price Asset Management. John Yackley, president of Be Free Investments, agrees. Yackley allows up to $15 per roundturn but prefers a lower rate and to share his incentive fees. I have an aversion to anybody in the food chain being paid just because a trade was done. Id rather pay on incentive. For most of the industry, fees are being squeezed. Many emerging CTAs find it difficult to retain even their management fees. Weingardt says there has been a trend away from paying management fees. He would like to see that reverse because he fears it could effect how managers trade. I hope that people find value in the CTA knowing that if market conditions are not conducive to your trading style to just sit on the money, Weingardt says. While defending management fees, Weingardt believes that brokerage should not be an endless pool for anyone to dip into. His performance is based on a $10 all-in fee and wont allow any third party to charge above $15. End users should be able to hire a CTA and pay nothing in addition to its management and incentive fees. If an astute investor [who discovered me through a ranking service] comes directly to me I could get them below $4 a roundturn. The track record is set on $10 a roundturn, Weingardt says. As a CTA, we have a fiduciary responsibility to our client, not to an IB or an FCM. Boshnack says that Vision is able to charge more because its selection process ensures that it is adding value. They want the selection. They want the third party research. They want us to recruit good managers to manage their alternative investment asset class, and people are willing to pay for it. People are willing to pay more of a fee to pay for our due diligence and pay for our strict criteria in selecting CTAs like Max Ansbacher, Boshnack says. He compares it to the investment banking industry. There are many
Breakeven Analysis
30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0% 0.00% MLJWH Strat. Alloc. Fund Quadriga Superfund Series A Quadriga Superfund Series B Moriah Futures Fund Dunn Cap. Mgmt. ACE (with $55 rt) 6.25% 8.75% 10.63% 6.80% 25.60%
Note: The ACE & Ansbacher figures are estimates based on their fee structure and the roundturn per million figure they provided the Barclay Map database. It includes a 6% load fee that only 50% of IBs use.
refers to the firm as the pioneer in retail managed futures. Vision does not offer retail in the true sense of creating public funds, but by marketing private placements, CTAs, with lower minimum investment requirements. Vision recommends CTAs some of them through exclusive arrangements with minimum investment levels between $25,000 and $100,000. Over the years Vision has developed a reputation for aggressive marketing and models that allow their guaranteed IBs to charge above-market fees. Vision would allow you to skin the cat any way you wanted to. I dont think there was a commission rate too high with that operation, says a veteran broker. NIBAs Schramm doesnt see a problem with Visions structure and says most IBs wont offer managed futures because its fee structure has to be so low. Vision has a unique structure in which it allows its IBs to charge a $55 roundturn fee or a 0.83% IB management fee (10% annually) in front of the typical CTA management and incentive fees. Vision also allows its IBs to charge up to a 10% load fee.
It is very simple: It is a $55 commission and the IBs get paid a portion of the $55. Or it could be fee-based. It is up to the broker how they want to charge. Basically, the CTA gets a 1% management fee and 20% of the profits and clearing is $55 and the IBs get $34 out of the $55, Boshnack says. The front load is optional and it is up to the broker to charge. He notes that load fees which Boshnack estimates that 50% of Vision IBs charge are standard structures for many mutual fund A shares and private placements. It is just a way for our brokers to make a living. We present a good product to someone, [they] make up that load in two or three months and the rest goes to the client. It is a way for the brokers to feed their families, Boshnack says. The problem is that the rest does not go to the client. The $21 roundturn rate that investors pay if they choose the 10% annual IB management fee is on the high end for brokerage without the IB management fee or an additional $34 a roundturn. This is a very competitive industry and CTAs can get really good service
62
IPOs. There are many companies that go down, and there are many investment banking deals that go bust, but the investment banker always makes his commission because they put them together and they gave them the opportunity to make it work. Visions CTAs have performed well. ACE Investment Strategists is up more than 28% through October in 2004 since Vision started marketing ACE. The program has a compound rate of return of 95% since its October 2001 inception. Vision exclusively offers Max Ansbachers retail program. The program is the same as Ansbachers highly successful full-sized program offered at a minimum of $25,000. While the programs are basically the same, the retail program is not able to participate in every trade because of its size. The retail program does not allow the $55 roundturn but does allow the 10% annual fee and load fee. Michael Doherty, Vision LP director of compliance, says that the added cost is not only due to the quality of the managers offered but also for added due diligence and back office support. We monitor the trading. We do all the allocations. We do the performance records to make sure the track records are accurate. We do the calculations of the incentive and management fees, Doherty says. However, Visions aggressive marketing has led to regulatory scrutiny. CTAs offering their programs through Vision must disclose in their D-doc that on August 2000 the NFA business conduct committee issued a complaint alleging that Vision and its founder Robert Boshnack used promotional material in violation of NFA rules. In April 2002 the committee issued a settlement decision ordering Vision to pay a $200,000 fine and requiring it to submit certain promotional material to the NFA for pre-approval. The charges were dropped, as is routine when there is a settlement. The case was the third in which Vision agreed to pay a fine to the NFA after being cited for alleged violations.
CANT LOSE
Promotional material sent out by Iowa Capital Mgmt., a Vision guaranteed IB.
Dear Investors,
What would you say if I said I have a trader that you could hire that has delivered over the last 35 months a compound rate of return of +96.6% and a total return of +616%!!! Well stop laughing and start reading. This is as real as it gets! Every initial dollar invested with this CTA in October 2001 is now worth $6.16. And, by the way, that is NET after all fees and commissions.
Past performance is not necessarily indicative of future results. The risk of loss exists in futures trading. In addition to the opportunity for profit, one must be aware that the possibility of unlimited loss exists in writing options.
Vision is currently sending promotional material to IBs extolling how brokers can earn $130,000 in 90 days. In promoting Ace Investments, Vision material states that for every $1 million raised for Ace, an IB will typically earn between sales loads and ongoing commissions $130,000 or 13%. That is a 13% hurdle for investors before they can see profits, which doesnt include the $21 roundturn rate to be paid to Vision or the CTA management fee (see Breakeven, left). Doherty says that Vision audits all of the CTAs it recommends prior to making a recommendation. Vision also prepares all promotional material and submits it to the NFA prior to any of its guaranteed IBs using it to solicit customers (see Cant lose, above). A LOSING GAME High fees are counterproductive for CTAs because they ultimately take away from their incentive fee. The problem is that you are passing on those increased costs to the investor, which is definitely going to hurt your performance, Perry says. I look to lower the commission rates to a very competitive level, [because] I have to, but the bottom line is that it is going to be better for our investors and it is going to be better for the
CTA because you are going to have the ability to improve their performance. In the third-party marketing relationships that we have, I look to be paid out of the incentive fee, Perry says. High up-front fees hurt the overall performance of a CTA. The CTA should be doing due diligence on the distribution model they are entering. You sign up for exclusive distribution you need to know what the distribution is going to charge, Cole says. Vision defends its fee structure by pointing out its added back office duties and manager selection process, but other third parties provide services without such a heavy burden. If you have faith in a manager, a third-party money raiser will share in the CTA management and incentive fees without taking a significant portion of a customers investment before it is allowed to work for the customer. We are counting on the fact that if we did our homework and this is a good CTA and a good product and we believe in it, theyre going to be successful and we in turn will eventually be compensated primarily through the fee structure, Perry says. FM Editors note: Visit www.futuresmag.com/ talk.asp to discuss this article with other traders.
63
TRADE TRENDS
When technology firm Trading Technologies was awarded patents for its depth of market order entry software, it sent a shudder through the industry. What does it mean for other software firms whose front-ends look similar to TTs? And with few profitable software firms, would TT turn to the deeper pockets of brokerages and exchanges to cash in on its patents?
Patent this!
arris Brumfield, CEO of independent software vendor Trading Technologies, estimates that 50% of the electronic trading volume at the worlds four largest futures exchanges is executed through TT front-end software. And of the remaining 50%, TT contends much of it is executed through systems that are infringing on TTs patents. Thus, TT is attempting to extract a 2.5 fee per every electronic contract executed at all four of the major exchanges. Indeed, a source close to TT says there have been substantive discussions between TT and the Chicago exchanges regarding TTs request. Since TT was awarded two patents for click-based trading with intuitive display of market depth by the U.S. Patent Office in August it has been
awarded a similar patent in the United Kingdom and the European Patent Office has issued an intent to grant a patent relating to the same technology. The widening of the patents to a global arena allows TT to approach Eurex and Euronext.Liffe with its plan. However, TT is not suing the exchanges, and no one has suggested that the company would have any grounds to sue the exchanges, but the fees ostensibly would help TT distribute exchange products and would be less disruptive to the industry than a 10 per contract fee charged to all FCMs using front-end software that TT says infringes on its patents. TT would be willing to drop current litigation and void service fee agreements stemming from settled litigation if the exchanges would agree to the subsidy, according to sources close to TT.
They will drop all litigation against people and firms infringing, and they will open up all intellectual property for everyone to use not only on this but on patents pending forever, the TT source says, adding that if TT gets a subsidy from the exchanges, the company would lower the price of its software or possibly eliminate it. Still many feel the exchanges are an odd target because they are not users of the software, though TT argues the exchanges benefit from it. The people who are using the software are the FCMs and the brokers. I find it difficult to see how the exchanges should pay for something they are not using, says Patsystems CEO Kevin Ashby. We now have a work-around solution so no one who is trading through Pats into those exchanges is using or abusing any-
TT is not SUING the exchanges and NO one has suggested that the company would have any GROUNDS to sue the exchanges, but the FEES ostensibly would HELP TT distribute exchange PRODUCTS....
64
bodys patent. I would object to everybody using Pats having to pay a tax. TT sued electronic marketplace developer and erstwhile patent litigator eSpeed shortly after being awarded the patents. While few in the industry had sympathy for eSpeed, which has created a significant profit center from settlements related to its ownership of the Wagner patent, when TT quickly filed and settled lawsuits with Goldenberg Hehmeyer and Kingstree, two firms closely associated with TT, people got nervous. Many industry sources felt the suits were a stalking horse, filed and settled quickly to give greater validity to the patent. The settlements, which set a 10 per contract user fee, could be precedent-setting and establish a tax on the industry for everyone not signed up with TT but who uses software that is vulnerable to litigation. The royalty rates that were agreed to may have some evidentiary value in a subsequent litigation on what damages should be, said Joseph Laughon, patent attorney with Clifford Chance US LLP at a roundtable on patents at the Chicago Futures Industry Association Expo in October. An explosion of patents is not uncommon in a new industry. Panelists at the roundtable noted that it has happened in the railroad industry and has happened with semiconductors. TT TO THE RESCUE One theory is that if TT would aggressively enforce its patents, it could indirectly hurt its own customers. TTs competitors have screens that look remarkably like TT screens. If TT is able and chooses to enforce its patents, it could cause a disruption with their clients, says Gary Schirr, president of technology consulting firm Market Solutions. While TT is the rarest of birds, an ISV that is actually profitable, those profits may not be as strong as one would expect from a company with its market share. The basic model of the industry
THAT WAS MY IDEA!

The futures industry is no stranger to patent law, R.S. Jennings for a time held a patent on the trading pit but apparently never held the right to big burly clerks used to take up space and block out competing order fillers.
pay per screen has really worked out to the disadvantage of TT because they did a wonderful job of getting the best and most active traders, but they are just getting a little more per screen than [Patsystems] does, even though Pats probably does a quarter of the volume per screen, Schirr says. It is a model that resulted from too many developers chasing too few customers with ISVs dropping fees to get in the door in the hope that increased scale would eventually create profits. When TTs patents were first announced, many in the industry thought it could be the end for many ISVs who were struggling to see a profit during times of record volumes and now face the possibility of having to
pay TT a licensing fee. But as TTs strategy unfolded, some in the industry surmised that it could change the fundamental model of how ISVs were paid a model many feel is stacked against technology providers and create a new model that would allow the ISVs a more equitable piece of the trading pie. Phillippe Buhannic, CEO of ISV Tradingscreen, is not a supporter of TTs lawsuits and questions the grounds they are asking for payments from exchanges. He also says that prior art may eventually invalidate the patents but does agree that the model in which ISVs are compensated is not working. That is where, in one sense, TT is right, Buhannic says. He says that
65
Trade Trends continued

THAT AINT CHUMP CHANGE!
TT is asking the four major futures exchanges to pay them 2.5 per electronic contract 5 per RT. Whether from exchanges, brokers or end users, a per contract fee would be more profitable than the current per screen fee TT and other ISVs charge. ing methodology called Reflector the company claims does not infringe on TTs patents. Not that it concedes its existing technology was infringing but the company says they feel more secure with Reflector. They are not alone. FCM Peregrine Financial Group announced that it would upgrade its Best Direct order entry system through a strategic alliance with technology firm TradeMaven. PFG will use and market TradeMavens proprietary software, which it claims does not infringe on the TT patent. Both firms are seeking patents on their new technology but see that as more of a defensive measure than turning the patents into a profit center. The problem with patent law is you can come out with a great idea and someone can adopt that idea and change it slightly to get a patent. We now have to get it patented, Ashby says. Laughon says the problem with workaround solutions is that customers may wish to be indemnified against lawsuits. If it is a savvy consumer who has knowledge of this TT patent war, they are going to want some assurance that if they buy this product they are not going to be exposed to any liability. LEGAL AND REGULATORY BATTLE A rash of patents and patent litigation has the potential to have a chilling effect on competition in the industry. Laughon points out that a patent is a right to exclude. Even though in most instances patent holders choose to license others to use patented material, in an industry with narrowing margins, any entity granted a patent on a technology in wide use by the industry would have the ability to exclude or set license fees at levels that could eliminate competitors and raise antitrust issues. The effect on the industry will depend in large measure at how broadly the court interprets TTs patent. Many in the industry felt and still feel that prior art should have invalidated the Wagner patent, which eSpeed used to collect $48 million in settlements from
$60
$50
$40 In Millions
$30
$20
$10
$0 CBOT CME November Euronext.Liffe YTD Eurex
exchanges, brokers and ISVs make up a matching triangle for futures execution but the only two sides making money are the brokers and the exchanges. If the model continues that way, then you will have no ISVs left. I dont think that is good for anyone. Not only are the exchanges not helping the ISV community but they are imposing costs for upgrades and system changes, Buhannic says. Ashby says that ISVs have created their own mess and must work their way out of it. If what [Brumfield] is doing is for the benefit of the industry, he would have talked to me about it first and asked for my support. I would be very interested to hear how what [TT] is doing is benefiting other ISVs, he says. Others argue that if TT could get paid by the exchanges, others could as well once they establish the proprietary nature of their own software.
The ISVs are dumb in that we could have kept our prices higher, but we all fought each other and brought the pricing down, Ashby says. He adds that other industries have examples were one key sector has been unprofitable due to a faulty pricing model. Ashby agrees that the ISV community is adding more value than it is being paid for but he isnt looking for scapegoats. Pats did its own little bit toward destroying the industry, and we have clawed our way back from it. I dont believe it is anybodys fault, and I dont believe I have a God-given right to go to exchanges and say pay Pats more money, Ashby says. I agree we are not making enough profit but I dont blame the FCMs and I dont blame the exchanges. I blame ourselves. WORK-AROUND Patsystems has recently released a trad-
66
exchanges. The cost of litigation was one reason eSpeed was successful. The chief factor was the patent itself. Nick Neubauer, CBOT chairman at the time, says that patents once granted are very hard to invalidate. Because of the potential to disrupt the industry as a whole, the Commodity Futures Trading Commission (CFTC) has taken an interest in the patent issue. CFTC Commissioner Walt Lukken speaking at the FIA panel noted that the CFTC does have authority to get involved but would do so begrudgingly. We have in our statute provisions to take a look at anti-competitive activities, and if we find something is being anti-competitive we have the ability to step in and prohibit it. You have to balance that with a private property right. When does one interest overtake the other? Lukken says. It would be a pretty high bar for us to get involved in private property rights that are legitimately held by people. Lukken sees the CFTC playing a larger role early on in the process, helping the patent office avoid awarding overly broad patents that would have a negative effect on the industry. We need to concentrate on making sure that patents that are issued in our industry are targeted, are legitimate and are not overly broad. Part of this is making sure that people issuing the patents have the right information and have access to prior art in this area. That is the role the CFTC should play primarily, Lukken says. The recent controversies are not the first time the futures industry has dealt with the patent issue and the possibility of an overly broad patent disrupting the status quo. Lukken noted that in 1877 Reuben S. Jennings of Chicago patented his invention of the trading pit (see That was my idea! page 65). The patent states: I, Rueben S. Jennings of Chicago, in the County of Cook and State of Illinois, have invented a new and improved Trading Pit or Platform, to be used by stock, provision and grain boards or boards of trade or exchange, or other associations of a like nature, as a
I dont believe I have a God-given right to go to exchanges and say pay Pats more money. I agree we are not making enough profit but I dont blame the FCMs and I dont blame the exchanges. I blame ourselves.
Kevin Ashby, Patsystems CEO
convenient stand while trading. Jennings goes on to describe the dimensions and acoustical advantages of his invention, and he asked for royalty payments from futures exchanges using the design. The courts ended up overturning the patent when challenged. Had the CFTC been involved, we might have prohibited this patent from ever being issued in the first place, Lukken says. What may be a key is how the court rules in a Markman hearing. A Markman hearing is where the court will tell the jury and the parties what the claims of the patent mean, Laughon says. A favorable interpretation of the Wagner patent in a Markman hearing in eSpeeds group of lawsuits against numerous exchanges put eSPeed at a great advantage and probably led to the exchanges decision to settle, according to Laughon. Having a broad interpretation on a patent, though, is a mixed blessing to a plaintiff. Laughon points out that while a broad interpretation would make it easier for TT to prove infringement, a broad interpretation also makes it easier for a defendant to claim prior art. An overly broad interpretation could also create antitrust and monopoly issues. The Futures Industry Association is watching the issue closely and has created a committee of the board directors to examine the issue. If there are other technologies out there that can be used in lieu of [Brumfields], that is one thing, but if the patent granted was so broad that nobody can invent a front-end system that doesnt in some way abridge that, then there are issues there that relate to anti-competitive practices, says John Damgard, FIA president. The strategic way in which TT is asserting its recently awarded patents indicates that it is not as interested in gaining a huge windfall as what seemed to be eSpeeds approach with the Wagner patent but that it is trying to fundamentally change the pricing model of the industry. With the trend in the industry inexorably moving toward electronic trading, having a healthy ISV industry is good for the futures industry as a whole. A strong and innovative ISV industry is good for the futures industry so finding a model that allows the ISVs to be profitable when they are innovative is good for the industry, Schirr says. Few in the industry see it likely that the four major exchanges will accept a 2.5 fee on electronic executions. However, with ISVs providing the gateway to end users to the exchange and having the capability to widen the distribution of exchange products, it may be beneficial for exchanges and the industry in general to find a model that allows all those in the value chain to profit. How the courts view the breadth of TTs patents will be vital to the industry. If they are viewed as valid upon challenge but are not interpreted so broadly as to restrict other ISVs from adopting work-around solutions, then it may ultimately have a positive effect on the futures industry. FM Editors note: Visit www.futuresmag.com/ talk.asp to discuss this article with other traders.
67
New For Traders

Send new product information to:
chart windows and news indexes.New tools now available include Market Fidelity Investments has released WealthProfile, point and figure and advanced seaLab Pro, trading software offering techniE-mail: ysalcedo@aip.com sonal charting. The tool also allows users cal indicators, charting, portfolio analysis to set parameters to monitor various markets and link real-time and simulation and real-time scanning. Wealth-Lab Pro also and historical data to Microsoft applications such as Excel. has 10 years of daily historical market trading data from Fidelity DTN ProphetX also delivers agricultural and energy forecasts, with 10 months of intraday minute bars, and the automated histories, current conditions and climate predictions. E-mail: trading functionality allows traders to execute trades handssscott@tunheim.com or call (952) 851-7216. off in real-time based on selected market entrance and exit strategies. Wealth-Lab Pro has been fully integrated into Interactive Brokers LLC (IB) has launched Inter-market Fidelitys Active Trader Pro trading platform and market data. Smart-Routing for Spread Orders, a new service that supCurrent Fidelity customers placing more than 120 trades in a ports spread strategies for equities and options traded across rolling 12-month period can use the software at no extra multiple U.S. markets. The service supports spread trading charge. Other features include drag-and-drop programming between options contracts, securities and options contracts, functionality to build and back-test customized trading stratestocks and exchange-traded funds (ETFs), and different gies. See www.fidelity.com or call (800) 823-0175. stocks. The program addresses the TradingScreen Inc. has launched TradeSmart version 2.0, spread trading risk a customizable trading front-end, which combines a where one segredesigned user interface with enhanced functionality for ment or leg of electronic trading across multiple asset classes. The product the complex order enables buy-side clients such as hedge funds, traditional remains unfilled. asset managers, private bankers and proprietary trading IB guarantees the desks to trade a broad portfolio of financial instruments entire spread is with a wide range of counterparties. TradeSmart gives executed or the users the ability firm will take responsibility for the order. IBs spread offering to aggregate can involve different financial instruments, equities, multiple dealETFs and options. Futures may be added at a later date. ers and prodSee www.interactivebrokers.com or call (203) 618-7711. ucts onto a single screen forAlgorithmics Inc. and Bloomberg LP have released Algo mat for the Risk version 1.6, which has features that enable users to electronic customize user interfaces to their specific requirements with order routing of more control over how information is displayed, processed both direct and analyzed. The new version allows users to remove and market access re-order sections and tabs to create a new front end. Risk discretionary analytics are now more transparent and users can see underorders and Notice of Executions to a large number of broker lying computations. With custom scenarios, users can now destinations. See www.tradingscreen.com. or e-mail philippe.buhannic@tradingscreen.com. name specific changes to the shape of interest rate curves, letting users interactively create additional curve shift scenarios and assess the impact those changes have on their portfolios. Historical reporting through time enables users Services to recall stored historical risk and P&L data to conduct DTN has released DTN ProphetX 2.5, a real-time market backtesting and performance analysis to compare the actual data tool and analytical workstation for futures traders. The performance over time of a portfolio or instrument to program offers customizable charts and analytics. Traders can expected results. Also included is more coverage of prodorganize and display data from all domestic and major internaucts including derivative products such as options and tional exchanges in a variety of industry-specific formats, swaptions. See www.algorithmics.com, www.bloomberg. including crack spreads, crushes or strips. News stories from com or call (212) 318-2517. major sources are available, and users can link quote sheets to
Software
Futures, 833 W. Jackson Blvd. 7th Floor Chicago, Ill. 60607, Fax: (312) 846-4638 Attn: Yesenia Salcedo
68
There is a risk of loss in futures trading Go to www.oners.ims.ca/4545-149 or call 888-804-6612
Book Reviews
Trend Following: How Great Traders Make Millions in Up or Down Markets
By Michael Covel Prentice Hall (2004) 311 pages, $27.50
REVIEWED BY JAMES T. HOLTER
Michael Covel had an intelligent, if somewhat ultimately slanted, approach to laying out this book. His method was to examine the players in financial disasters, but not those who were losing all the money theyve had their share of headlines. Covel wanted to know who made all the money that was lost.
Having found the winners generally, those money managers who had strong returns during the periods of the scandals he compared them and found that many, such as John W. Henry, who profited handsomely during the Barings Bank fiasco, were trend followers. That led him to explore questions such as, How do trend followers win in the zero-sum game of trading? and Why has trend following been the most profitable style of trading? Before going any further, perhaps a few trading neophytes and quite a few trading pros know those are loaded questions. Of course, more trend following money managers made money during select scandals. More trend followers also lose money when the
managed money industry as a whole suffers a rough spot. The reason is simple: More professional money managers are trend followers, and that alone doesnt make trend following the best strategy anymore than it makes it the most marketable to institutional investment allocators. Understanding that, it may just as reasonably be asked how option sellers, contrarian traders, fundamentalists, pit traders or Elliott Wave enthusiasts make money trading. Still, the point isnt to question the value of a book on trend following. It is indeed the most popular trading discipline. It is indeed profitable in the hands of many traders. Trend following is certainly a capable way to trade, but its not the only way. If you can get beyond that nugget of bias, youll be rewarded with a quality education in this trading approach. One strong point of this book is it puts you into the mind of a successful trend trader. It helps you understand the sentiment, risk aversion (or lack thereof) and profit time frame youll need to embrace mentally to make a trend-based approach work. Youll also find practical knowledge facts youll need to know to implement a trend-following trading program. Covel looks at trading system development (targeting novices its not too technical) and basic data such as what markets successful trend traders trade well. Money management (how much to trade) is addressed and risk management (protecting the downside) is given its due. There is also practical discussion of what many traders consider far more important than whether you get into a trade using moving average crossovers or even a six-sided die: exit management. Beyond that, however, the practical advice is limited. Those with serious intentions of systematic trend trading, would do well to pick up a general book on system development, such as Cybernetic Trading or Trading Systems that Work. Trend Following is accessible (you can come into it completely green)
and it is comprehensive in its stated subject matter. If youre a beginner who wants to trend trade or if youre an experienced Gann trader, for example, who wants exposure to another approach, this book will do it.
Candlesticks, Fibonacci and Chart Pattern Trading Tools: A Synergistic Strategy to Enhance Profits and Reduce Risk
By Robert Fischer and Jens Fischer John Wiley & Sons (2003) 256 pages, $89.95
REVIEWED BY JAMES GOULD
The authors promise to provide readers with an easy, reliable trading method and tools together with trading rules that can be applied to realtime trading. Their trading method is a trend-following system based on Fibonacci ratios, candlestick patterns, Elliott wave theories and PHI-ellipses. As is true of all trend-trading methods, market entry is late OK because false price moves are reduced and so is market exit not OK because profits are reduced. PHI-ellipses, the heart of the trading method, are patterns of varying elliptical shapes formed over time based on current price patterns. For PHI-ellipses to be a reliable trading signal, their formation must follow strict rules as a three-wave price correction, which must occur within boundaries circumvented by the ellipse. Price breakouts from a properly constructed PHI-ellipse become the signal to enter or exit a trade. The authors contend the accuracy of PHI-ellipses can be improved by incorporating candlestick formations and Fibonacci ratios. Construction of PHI-ellipses is based on a proprietary data transformation; however, accompanying software enables readers to construct and use PHI-ellipses on their own data. Ten years of data having the same price scale are recommended to fine-tune PHI-ellipse patterns. PHI-ellipses can be constructed from monthly, weekly, daily or intraday prices and can be used for equities, indexes or commodities.
70
The book is reader friendly. Mathematics and statistics are almost non-existent. The authors provide an excellent overview and summary of candlestick analysis, Fibonacci and chart patterns. Also discussed is how to determine estimated price targets using Fibonacci ratios. Many charts (mostly equities) are used to illustrate ideas presented. Several actual case histories also are included to illustrate how the theory was applied in practice. And an excellent summary of major con-
cepts is presented in a final chapter. The books appendix contains a manual for using PHI-ellipse software, which is included with the book. The authors also invite readers to visit their Web site (www. fibotrades.com) for assistance. To appreciate this book, you must accept the premises of technical analysis. Readers familiar with the essentials of technical analysis, especially candlesticks, Elliott wave and Fibonacci, will find the book to their liking because it builds on these concepts. Readers
interested in knowing more about these trading ideas also will benefit. The book offers all readers the promise of fine-tuning their trading method, even if the PHI-ellipse concept does not work as promised. Most readers will have to read this book carefully several times to get its full benefits. If you are serious about fine-tuning your technical skills and if you like trading with candlesticks, Elliott wave analysis and Fibonacci, then this is a book you should buy. If you are new to technical analysis, you might want to borrow the book or postpone reading it until you are adequately versed in the essentials of technical analysis.
James S. Gould is a professor of marketing at Pace University in White Plains, N.Y. E-mail him at jgould@pace.edu.
71
Dateline
JANUARY
MONDAY TUESDAY WEDNESDAY THURSDAY FRIDAY
3
COT report. Australia Production index
4
Crop summary. Germany Employment
5 12
Cotton ginnings, Annual Crop production, Grain stocks, Production index. U.K. Merchandise trade
6 13
Japan Balance of payments. U.K. Production index. Australia Employment. France CPI
7
COT report, Employment
10
Merchandise trade. U.K. PPI. Germany Merchandise trade
11
Crop summary. France Production index, Merchandise trade. Germany Production index Holiday: U.S.
14
COT report, PPI. Germany CPI. Balance of payments
17 24
18
U.K. CPI. France Balance of payments
19
Crop summary, CPI. U.K. Unemployment. Germany PPI. Australia Merchandise trade
20 27
Japan Merchandise trade
21
COT report, Livestock slaughter, Cattle on feed
25
Crop summary. Australia CPI
26 2
Crop summary
28
COT report. Japan Production index, Employment, CPI. France Unemployment, PPI
Cotton ginnings. Australia PPI
31
4
COT report
C O N T R A C T D AT E S
3 FND: BM&F Alcohol F, Cotton F, Nybot Orange juice F. LTD: BM&F Alcohol OF. 7 LTD: CME CME $ Index OF, Currencies OF, Live cattle OF, Nybot Currencies OF, Dollar index OF, Feb Cocoa OF. 10 LTD: BM&F Alcohol F, Nybot Orange juice F. 14 LTD: BM&F Feb Cotton OF, Feb Arabica coffee OF, Feb Conillon coffee OF, CBOE, Amex, PCX, Phlx, ISE Currency O, CBOT Soybeans F, Soybean oil F, Soybean meal F, CME 13wk. T-Bills OF, Eurodollar F,OF, Euroyen OF, Libor F,OF, Lumber F, Peso F, Nybot CRB index F, CRB index OF, Feb Coffee OF, Feb Sugar OF. 17 LTD: BM&F Live cattle OF, CME Rand F, Eurex 1-,3-mo. euribor F. 18 LTD: BM&F Feb Soybeans OF, CBOT DJCI F, CME 13-wk. TBills F, GSCI F,OF , Mexican Cetes F. 19 LTD: CME Mexican TIIE F. 20 LTD: CBOE, Amex, PCX, Phlx, ISE A.M. settled index O, CBOT Rice F, Nymex Feb Crude oil F. 21 FND: BM&F Arabica coffee F. LTD: CBOE, Amex, PCX, Phlx, ISE P.M. settled index O, CBOT DJIA OF, Feb Tbonds/10-,5-,2-yr. T-notes/inflation-indexed Treasuries OF, Feb Grains and oilseeds OF, CME E-mini S&P 500 OF, S&P 500 OF, S&P 500 Barra Growth OF, S&P 500 Barra Value OF, S&P 400 OF, Russell 2000 OF, Nikkei 225 OF, Nasdaq 100 OF, Eurex Dutch equity O, Finnish equity O, French equity O, German equity O, Italian equity O, Titans OF, Stoxx 50 OF, Dax OF, Nemax 50 OF, SMI OF, Hex 25 OF, Swiss equity O, KCBT Value Line OF, Feb Wheat OF, MGE Feb Wheat OF, Nybot Stock Index OF, Feb Orange juice OF. 24 LND: Nybot Orange juice F. LTD: BM&F Feb IGP-M F, Eurex bobl/bund OF, schatz OF, Euronext-Liffe Feb Long gilt/bund OF. 27 LTD: CBOT Gold F, Silver F, CME Feeder cattle F,OF, Nymex Aluminum F, Copper F, Gold F, Palladium F, Platinum F, Silver F, Feb Natural gas F. 31 FND: CBOT Feb Gold F, Feb Silver F. LTD: BM&F Arabica coffee F, Cotton F, Feb Ei bond F, Feb Euro F, Feb Gold F, Feb IDI O, Feb US dollar F,O,OF, Feb 1-day deposits F, Feb IDxUS dollar F, CBOT Fed funds F, CME Live cattle F, Feb Real F,OF, Feb Lumber OF, Eurex Eonia F, MGE HWI F,OF, Nymex Feb Heating oil F, Feb Propane F, Feb Unleaded gas F.
72
FEBRUARY
MONDAY TUESDAY WEDNESDAY THURSDAY FRIDAY
31 7 14 21 28
Japan Production index Japan Balance of payments. U.K. PPI
1
Crop summary. Australia Merchandise trade
2
Germany Employment Crop summary. Germany Production index
3 10
4
COT report
Managed Funds Association Network 2005. FEB. 6-8. The Ritz-Carlton, Key Biscayne, Fla.
Cotton ginnings, Crop production. U.K. Production index, Merchandise trade
Japan PPI. Germany Merchandise trade. France Production index. Australia Employment
11
COT report. France National accounts. Merchandise trade
15 22
Crop summary. U.K. CPI.
16
Japan National accounts. U.K. Unemployment
17 24
Crop summary
18
COT report, Cattle on feed. Germany CPI
International Online Traders Expo. FEB. 12-15. The Marriot Marquis Hotel, New York.
Holiday: U.S.
23 2
Crop summary
25
COT report, Livestock slaughter. Japan CPI, Merchandise trade. France PPI
Crop summary. France CPI
4
COT report, Annual Livestock slaughter
ABOUT THE CALENDAR Dates are believed to be correct but sometimes do change. Holidays may affect government offices or banks but not trading. Check with your broker or the exchange. Reports are U.S. reports unless indicated otherwise. Contracts traded are for current month unless indicated. Abbreviations used with contracts: F futures. OF options on futures. O options. LTD last trading day. FND first notice day. LND last notice day.
Last trading day Contract month JAN FEB
Last trading day JAN FEB
CBOE, Amex, PCX, Phlx, ISE A.M. settled index O ....1/20 ......2/17 Currency O ..................1/14 ......2/11 P.M. settled index O ....1/21 ......2/18
Soybean oil F ..............1/14............Soybeans F ..................1/14............T-bonds/10-,5-,2-yr. T-notes/inflation-indexed Treasuries OF ............12/23 ......1/21
E-mini Nasdaq 100 OF ....- ......2/18 E-mini S&P 500 OF ....1/21 ......2/18 Eurodollar F ......................- ......2/14 Eurodollar F,OF............1/14............Eurodollar midcurve OF ..- ......2/11 Eurodollar OF ....................- ......2/11
Mexican Cetes F ..........1/18 ......2/15 Mexican TIIE F..............1/19 ......2/16 Mid-sized milk OF ........2/3............Milk F,OF ........................2/3 ........3/3 Nasdaq 100 OF ............1/21 ......2/18 Nikkei 225 OF ..............1/21 ......2/18 Peso F ..........................1/14 ......2/14 Pork bellies, frozen F ......- ......2/23 Pork bellies, frozen OF ....- ........2/4 Rand F ..........................1/17 ......2/14 Real F ........................12/31............Real F,OF ..........................- ......1/31 Real OF ......................12/30............Russell 2000 OF ..........1/21 ......2/18 S&P 400 OF..................1/21 ......2/18
S&P 500 Growth OF ....1/21 ......2/18 S&P 500 Value OF........1/21 ......2/18 S&P 500 OF..................1/21 ......2/18 Weather F,OF ................2/2 ........3/2
Nybot Cocoa OF......................12/3 ........1/7 Coffee OF....................12/10 ......1/14 CRB index F..................1/14 ......2/11 CRB index OF ..............1/14 ......2/11 Currencies OF................1/7 ........2/4
CBOT CFE DJCI F ..........................1/18 ......2/15 Vix F ..................................- ......2/15 DJIA OF ........................1/21 ......2/18 Fed funds F..................1/31 ......2/28 Gold F ..........................1/27 ......2/24 Grains and oilseeds OF12/23 ....1/21 Rice F ..........................1/20............Silver F ........................1/27 ......2/24 Soybean meal F ..........1/14............CME 13-wk. T-Bills F ..............- ......2/14 13-wk. T-Bills OF........1/14 ......2/11 CME $ Index OF..............1/7 ........2/4 Currencies OF................1/7 ........2/4
Euroyen OF ..................1/14 ......2/11 Feeder cattle F,OF ......1/27............GSCI F,OF ....................1/18 ......2/15 Lean hogs F,OF ................- ......2/14 Libor F,OF ....................1/14 ......2/14 Live cattle F ................1/31 ......2/28 Live cattle OF ................1/7 ........2/4 Lumber F......................1/14............Lumber OF ................12/30 ......1/31
KCBT Value Line OF ..............1/21 ......2/18 Wheat OF....................12/23 ......1/21
Dollar index OF ..............1/7 ........2/4 Ethanol F............................- ......2/28 Ethanol OF ........................- ......2/11 Mini coffee F ....................- ......2/16 Orange juice F ............1/10............-
MGE HWI F,OF ......................1/31 ......2/28 NCI/NSI F,OF......................- ......2/28 Wheat OF....................12/24 ......1/21
Orange juice OF ........12/17 ......1/21 Stock Index OF ............1/21 ......2/18 Sugar #14 F..................12/8............Sugar OF ....................12/10 ......1/14
73
Next month in Futures
Dateline continued
AD INDEX
ADVERTISER PAGE ADVERTISER PAGE
Tops & Bottoms 2004

You couldnt keep a good commodity down in 2004, when crude, gold, soybeans and other markets broke hard to the upside. However, they also broke some traders, with money managers banking one of their weaker years. Meanwhile, the U.S. patent office has been issuing patents on displaying market depth and the proud new owners are not being shy about using them.
Alaron . . . . . . . . . . . . . . . . . . . . . . . . . . . .C3 Chicago Board Of Trade . . . . . . . . . . . . . .7 CMC Group . . . . . . . . . . . . . . . . . . . . . . . .15 CMC Group . . . . . . . . . . . . . . . . . . . . . . . .33 Capital Market Services, LLC . . . . . . . . . .29 Commodity Price Charts . . . . . . . . . . . . . .81 Direct Trade . . . . . . . . . . . . . . . . . . . . . . .47 Esignal . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 Futures Magazine Group . . . . . . . . . . . . .39 Futures Magazine Subscriptions . . . . . . .69 Futures Trading Academy . . . . . . . . . . . .47 Global Forex Trading . . . . . . . . . . . . . . . .35 Go Futures . . . . . . . . . . . . . . . . . . . . . . . . .40 Interactive Brokers . . . . . . . . . . . . . . . . . .16 InterShow . . . . . . . . . . . . . . . . . . .50a,b,c,d Man Financial . . . . . . . . . . . . . . . . . . . . . .C4
MG Financial . . . . . . . . . . . . . . . . . . . . . . . .9 Need to Know News . . . . . . . . . . . . . . . .41 Open-E-Cry . . . . . . . . . . . . . . . . . . . . . . . .20 Pricecharts.com . . . . . . . . . . . . . . . . . . . . .13 Qcharts from Quote.com . . . . . . . . . . . . . .3 Quadriga Asset Management. . . . . . . . .31 QuoTrek by eSignal . . . . . . . . . . . . . . . . .11 Reader Service . . . . . . . . . . . . . . . . . . . . .75 Refco . . . . . . . . . . . . . . . . . . . . . . . . . . . . .c2 Trade Bolt . . . . . . . . . . . . . . . . . . . . . . . . .40 Tradestation . . . . . . . . . . . . . . . . . . . . .p4-5 Trade-System, Inc. . . . . . . . . . . . . . . . . . . .12 Trends in Futures . . . . . . . . . . . . . . . . . . .55 Wisdom Financial . . . . . . . . . . . . . . . . . . .20 Xpresstrade . . . . . . . . . . . . . . . . . . . . . . . .27 Xpresstrade . . . . . . . . . . . . . . . . . . . . . . . .71 SEE CLASSIFIED ADVERTISING ON PAGES 7681
Power wars
Most of the talk and attention has settled on crude recently, and with good reason, but natural gas is making a case for itself as the energy to watch. Whats in store for energy market traders?
EVENTS COMING UP
Call the numbers listed for more information. For other seminars, see the classifieds on pages 76-81.
GARP 2005 6th Annual Convention and Exhibition. JAN. 31-FEB. 3. Marriot Marquis Hotel, New York. +44 (0) 20 7626 9303. www. www.garp.com/events/garp2005. E-mail: katherine.barnes@garp.com. Investment Education Symposium. FEB. 2-4. Royal Sonesta, New Orleans. www.opalgroup.com. (212) 532-9898. Managed Funds Association Network 2005. FEB. 6-8. The Ritz-Carlton, Key Biscayne, Fla. (202) 367-1140. www.mfainfo.org. E-mail: hq@mfainfo.org. International Online Traders Expo. FEB. 12-15. The Marriot Marquis Hotel, New York. (800) 970-4355. www.tradersexpo.com. FIA Annual International Futures Industry Conference. MAR. 16-19. Boca Raton Resort and Club, Boca Raton, Fla. (202) 466-5460. www.futuresindustry.org. FIA OpTech 2005. APR. 12. Marriott Marquis Hotel, New York. www.futuresindustry.org. (202) 466-5460.
Nonlinear model for S&P

This article will demonstrate the building of a nonlinear trading model for the S&P 500 using financial modeling software.
Option selling liquidity

We look at specific indicators of liquidity and which markets are worth our hard-earned trading dollars.
Last trading day Contract month JAN FEB
Nymex Aluminum F..................1/27 ......2/24 Copper F ......................1/27 ......2/24 Crude oil F..................12/20 ......1/20 Gold F ..........................1/27 ......2/24 Heating oil F ..............12/30 ......1/31 Natural gas F ............12/28 ......1/27 Palladium F..................1/27 ......2/24 Platinum F....................1/27 ......2/24 Propane F ..................12/30 ......1/31
Alcohol F ......................1/10 ......2/10 Alcohol OF......................1/3 ........2/1 Arabica coffee F ..........1/31............Arabica coffee OF......12/10 ......1/14 Conillon coffee OF ....12/10 ......1/14 Cotton F ........................1/31............Cotton OF ..........................- ......1/14 Ei bond F ....................12/31 ......1/31 Euro F ........................12/31 ......1/31 Feeder cattle F..................- ......2/28
IDI O............................12/31 ......1/31 IDxUS dollar F ..................- ......1/31 IGP-M F......................12/24 ......1/24 Live cattle F ......................- ......2/28
Dutch equity O ............1/21 ......2/18 Eonia F..........................1/31 ......2/28 Finnish equity O ..........1/21 ......2/18 French equity O ..........1/21 ......2/18
Euronext-Liffe Equities (Den, Fin, Fra, Ger, Gre, Ire, Net, Spa, Swe, Swz, UK, USA) F ................- ......2/18 Equities (Italy, Nor) F........- ......2/17 Equities O ..........................- ......2/18 Euribor F,OF ......................- ......2/14 Eurodollar F,OF ................- ......2/14 FTSE 100 O ........................- ......2/18 FTSEurofirst O ..................- ......2/18 Long gilt/bund OF ............- ......1/24 Swapnote F,O....................- ......2/14
Safex Bonds F ............................- ........2/3 Jibar F................................- ......2/16 Rand F ..............................- ......2/14
Live cattle OF ..............1/17 ......2/15 German equity O..........1/21 ......2/18 Soybeans OF ....................- ......1/18 Sugar F..............................- ......2/10 US dollar F,O,OF ........12/24 ......1/31 Hex 25 OF ....................1/21 ......2/18 Italian equity O ............1/21 ......2/18 Nemax 50 OF................1/21 ......2/18 schatz OF ....................1/24 ......2/21 Eurex 1-,3-mo. euribor F......1/17............3-mo. euribor F................- ......2/14 bobl/bund OF ..............1/24 ......2/21 Dax OF ..........................1/21 ......2/18 SMI OF..........................1/21 ......2/18 Stoxx 50 OF ..................1/21 ......2/18 Swiss equity O ............1/21 ......2/18 Titans OF ......................1/21 ......2/18
Silver F ........................1/27 ......2/24 Feeder cattle OF................- ......2/15 Unleaded gas F..........12/30 ......1/31 Gold F ........................12/31 ......1/31 BM&F 1-day deposits F ..............- ......1/31 Ibovespa F,OF............12/31 ......2/16 iBrX 50 F............................- ........2/1
74
SEE SOMETHING YOU LIKE?

FUTURES MAGAZINE ADVERTISERS CAN GET YOU SET UP, IN TOUCH AND TRADING THE MARKETS SUCCESSFULLY.
FOR FREE PRODUCT INFORMATION
1) Please fill out the card below. Simply print your name, address and telephone number on the form below, then answer the questions. 2) Circle the numbers on the card that match the number at the bottom of the ads that interest you and MAIL or FAX this page to: Futures, P.O. Box 5167, Buffalo, NY 14205-5167 or FAX it to: 416-620-9790. Or, go directly to our web page at futuresmag.com and hit READER INFORMATION, where you can fill out the information online in one easy step. THANKS for reading FUTURES MAGAZINE. Our advertisers are anxious to provide additional information to help you become a better trader. Either fill out this form or go to our web site for additional information.
FREE PRODUCT INFORMATION

(Complete all information for proper lead fulfillment.)
u YES, Please start/continue my one year subscription to Futures Magazine

Name: Signature: Title: Company: Address: City: Phone: E-Mail (required): State: Fax: Zip: Date:
u No
100 101 102 103 104 105 106 107 108 109
110 111 112 113 114 115 116 117 118 119
120 121 122 123 124 125 126 127 128 129
130 131 132 133 134 135 136 137 138 139
140 141 142 143 144 145 146 147 148 149 150
To Receive FREE info from an ad, circle the # that corresponds to those found in the magazine.
FOR MORE INFO ON AN ENTIRE CATEGORY OF PRODUCTS CIRCLE THE APPROPRIATE NUMBER
Which best describes your primary interest or involvement in futures and options (select only 1). 101 u Individual trader or speculator. 106 u Brokerage (institutional or retail broker, floor broker, IB, etc.). 107 u Professional money manager. 110 u Institutional or corporate trader, risk manager. 115 u Other___________________________ Which products do you trade? (Select all that apply). 216 u Futures 212 u Options 211 u Stocks 220 u Other_______________
9001 Brokers 9002 Trading Software 9003 Trading Hardware 9004 Exchanges 9005 Data Providers 9006 Books & Tapes 9007 Industry Providers, Regulators, Educators, Accountants
For Quick Response FAX to 416-620-9790
(RS0501)
THE FCM IB NETWORK

Where Introducing Brokers, Associated Persons and Futures Commission Merchants make the Right Connections.
FCMs! For advertising details contact: Jennifer Testa 847-526-7434 or email: jtesta@aip.com
76
Advisory Services
Classified Advertising WORKS! For Classified Information,
Jennifer Testa Fax Email 847-526-7434 847-526-7435 jtesta@aip.com
Try as we might, its impossible to know each Futures advertiser as well as wed like. For that reason, Futures Magazine cannot endorse any product or service advertised, we urge you to use discretion when ordering.
Hedge Trading Method

Very Profitable 100% Accurate -- No Losses 25% to 100% return
www.indexanalysisservice.com
843-449-6919
Advisory Services
www.Emini-Master.com
S&P 500 Scalping Tools
Play with the Big Boys--Free Trial
Program Trading Unveiled
FREE TRIAL CHAT ROOM

LIVE TRADING RECOMMENDATIONS. TALK WITH A PROFESSIONAL TRADER. BLUE BLANKET TRADING 800-631-3947 TRADE EMINI EQUITIES $1.90/side* There
is a risk of loss in trading futures & options.
Trade with todays most accurate S&P daytrader. Our Fourth Year! Free trial and Nightly Report. 888-231-4702
P a g e Tr a d e r. c o m
FCMs!
Are you looking to increase your IB business? Thousands of IBs turn to the Futures FCM/IB Network every month. For advertising details contact: Jennifer Testa (847) 526-7434 Fax: (847) 526-7435 Email jtesta@aip.com
Wm. Grandmills Investing in grains taking record profits with safety www.GrainsNewsletter.com FREE SUBSCRIPTION S&P Probability Daily Analysis You wont believe it until you see it www.daytradingcalendar.com
Trend Following Trading Courses: trendfollowing.com

TRADE WITH CONFIDENCE Learn to Trade the E-mini's, S&P, DOW, FOREX, & Stocks with confidence at our upcoming workshop in Las Vegas, January 23 & 24, 2005 www.trendpro.com 530-243-0999
FREE 2-WEEK TRIAL

Market Update Center A Turn-Key Approach to Trading www.fieldfinancial.com/futures 1-800-800-6304
PATTERNTRADER.COM
EMINIS--10 YEAR NOTES LIVESTOCK-GRAINS DIVERSIFY YOUR TRADING
MoonTide S&P Software forecasts intraday moves in any market. Also S&P hotline. http://moneytide.com 303-452-5566
FREE TRIAL--View Live Real Time Signals

www.trendpro.com
S&P - Dow Emini Traders FREE TRIAL - Live Real Time Signals No credit card required mike_trader@comcast.net
77
Classifieds
Brokerage Services Brokerage Services Brokerage Services
Integrated Brokerage Services, Inc. -Professional clearing services for Independent/Guaranteed IB's and startups. Ask for Denise or Mark at 800-691-2787 to discuss our product line & competitve rates.
Existing IBs & Start-Ups

Unlimited Earning Potential Best Quality Leads & Products!
We are Vision L.P., ranked within the top 30 largest FCMs, and one of the largest providers of IB services in America! We offer: Some of the highest payouts in the industry. Reliable, cutting edge Internet trading platforms. Top ranked trading systems, & managed accounts. An arsenal of broker assisted aides. Free Hightower Research Free Famous trading hotlines, and commodity trading newsletters Ability to transact both futures and stock business. Fresh high quality advertised leads Ask for our free IB Information kit, detailing our benefits and services. Call Justin Boshnack 212-859-0278 or e-mail jb@visionlp.com Florida IBs/Start-ups call 561-414-8680
Business Opportunities
Unique Business Opportunity

CommandoTrader.com is for sale Principals only 480.657.7118
Charting Services
SM
SystemNow
SM
!as seen on CNBC! Excellent execution Professional service Knowledgeable brokers Contingency orders Competitive rates Clears through large FCM Call Jeff Yasak
1-800-426-2918
www.tradesystemnow.com A Division of Man Financial Futures trading involves risk of loss.
Data
Historical data on world futures or stocks. Visit or call-csidata.com store.yahoo.com/csidata/ (800) 274-4727
Daytrading
We treat your account as if it were our own.
www.BestDayTrader.com
Join our Trading Arcade
$0.99 CME - GLOBEX $1.08 E-CBOT - 30 YR BONDS $1.00 EUREX - BUND. BOBL & SCHATZ All Contracts per side, ALL FEES INCLUDED www.churchillfutures.com Best Real-Time Stock Picks LIVE DAY TRADING Chat Room, SWING TRADING PICKS OPTION TRADING PICKS www.bestdaytrader.com Dont be left out!!! THE MOST POWERFUL DAYTRADING PROGRAM ON THE PLANET. Prepare to be amazed.1 pt. stops. 10 pt. targets. One week FREE TRIAL. Call Danny 1-800-443-3915
We understand complex system instructions We accept specialty orders most brokers wont More than 60 years combined experience Competitive commission ratescall now!
Call Susan Green join the Green Team today!
1-800-541-5631
Man Financial 440 S. La Salle, Chicago, Il 60605
Futures trading is speculative and involves risk of loss.
STOP BUYING OPTIONS! and start selling them. Let our option writing specialists show you how to make time value work for you instead of against you. For a free information packet call LIBERTY TRADING GROUP 800-346-1949 www.optionsellers.com
(futures trading involves risk, you can lose more than your initial investment)
He said Trade Emini S&Ps/NASDAQ. She said Trade the mini Dow-volume is up/ bid-offers are tight. FREE TRIAL of pivot numbers and multiple trading platforms Peak Trading Group - 800-559-7109 cnedoss@peaktradinggroup.com
There is risk of loss in futures trading
Discount Brokerage
Grains & Meats $11 r/t Flat E-minis $4 r/t Flat sandburrfutures.com 866-771-8828
FREE QUOTES & RECOMMENDATIONS REFCO EXPRESS ONLINE TRADING Call 1-877-741-1112 (Also offer full service at discount prices) www.refco.com
ATTENTION DAYTRADERS
Try our system in the Bonds, Swiss and S&P. Track us for a week. Join us forever! Competitive commissions. Susan Green (800) 541-5631 Fax (312) 902-6190
$1.45 Per side E-minis

Free Trial - www.advancedfutures.com
78
Classified advertising works! Call Jennifer Testa @ 847-526-7434 jtesta@aip.com
Discount Brokerage
Educational Services
TRADE SMART
Competitive Commissions 4 Online trading platforms NEW real-time quote/chart
package (Free Trial)
888-499-4319
w w w. s m t f u t u r e s . c o m
SuperFutures.com
Rates gone wild, on-line or direct! 888.217.7683 -- 312-789-8415 Free Market Analysis!
Trade Futures Online!

www.expressfutures.com Choose your RATES! E-minis $450 Day Trading Margin Name Your Own Commission www.LionsFutures.com (800) 222-6736
EMINIS.COM - $2.98 Rate

www.eminis.com 888-499-4319
DVD Trading Rentals

Profit from our trading DVDs and CDs Rent as many as you want 2 Week FREE TRIAL InvestorFLIX.com/fm 1.800.620.FLIX
These are the trading secrets successful stock & futures traders DONT want you to know. Who Else Wants To Know The Trading Secrets That Let Me make $200,000 Trading PART-TIME IN ONLY ONE YEAR? myinstantprofits.net
Know when the market turns Before it turns on you!
Only Trade 2 Hours A Day Real-Time ES Service
www.reversalmagic.com
One-on-One 5-Day E-Mini Futures
course with full year of personal mentoring. A serious course for career traders. 6 locations. 11th year of educating daytraders worldwide.
TraderBRAD.com
Precise, Simple & Profitable Trading System
Professional trader teaches you his renowned
www.DayTradingCourse.com
Winning Edge S&P Day Trading System

Private tutoring and live coaching. Weekend and live trading workshops. Comprehensive manual and proprietary software. FREE ONLINE SEMINARS Winning Edge Day, Swing, & Position Signals 1-800-500-5207 www.winningedgesystem.com
BEST TRADING BOOK EVER!

www.tradingdaybyday.com www.FuturesTradingSecrets.com Free Consultation Call 1-888-404-1212 JOE ROSS Free Spread Trading Newsletter www.spread-trading.com
A Must See Website
www.TracknTrade.com
Request a Free 30 Day Trial CD
Bond Trading Using Patterns and Setups www.bonddaytrading.com A Manual for Day-Trading the Futures Markets!
A Must See Website
www.GeckoCharts.com
79
Classifieds
Educational Services Forex Managed Accounts Software
ACCOUNTING SOFTWARE
Powerful New software suitable for all traders up to fund managers. Uses Microsoft SQL database. Updates last prices automatically free! AutoPost feature automatically reads daily downloads from Broker. Easy to use! Full details, demos, and manuals available from: TECHNICOM, INC. (954) 568-3848 www.technicominc.com
www.FXTrader.net
The professional forex trader
Forex Services
Trading Methodologies
IS YOUR MIRACLE SYSTEM MOSTLY LOSING WHEN TRADING REAL MONEY? You always create what you fear the most! Regain control over your trading. Guaranteed to erase trading fears. Learn Remote Viewing & Influencing to control the power of your fears and tap into your deep intuition. Declassified by CIA 95. Proven results. www.probablefuture.com/p708.htm 1-561-243-2087
Free Stuff
Want More Leads for your Business?
Post your free offer on www.futuresmag.com/freestuff/freebies.asp and you will be emailed leads daily. This is a web based lead genertion program that is a great way to generate qualified leads for your business. $10 per lead. For more info, contact Jennifer Testa at 847-526-7434 or email jtesta@aip.com
Trading Systems
TAKE CONTROL OF YOUR FINANCIAL FUTURE

The Profitunity Trading Group has over 40 years of trading experience in both futures and stocks. For more free information visit our website at www.profitunity.com or call 760-436-8054.
Newsletters
DOES YOUR ADVISOR PUT THEIR MONEY ON THE LINE? AND CAN THEY PROVE IT? Trends in Futures editor George Kleinman emails you his trades each evening for the next day. He will tell you where he gets filled and where he is placing his stops. Review the service for free for two weeks at www.trendsinfutures.com and see for yourself.
GANN GANN GANN

FREE Gann trading and forecasting newsletter, and numerous articles, based on the original,authentic works of the legendary W.D. Gann: www.lambertganneducators.com
Professional Services Employment Opportunities

Proprietary Forex Traders wanted Qualify to trade our Capital! Initial minimum capital required during evaluation period Kwright@efxgroup.com for more information
ATTORNEY
Commodities Litigation / Appeals & More 866-543-2818 thmpson@pacbell.net Easy! Options Software! Instant Option picks & analysis with The Push-Button Option Trader 800-407-2422 www.options-inc.com System Trading Specialists www.keenercapital.com 828-697-0991
Exam Preparation
Futures Series 3 & Stock (S-7) NASD NFA Exam Courses/Sponsors 800-344-0335 www.aaalearning.com
Programming
System / indicator programming, integrated portfolio position sizing. Trading Recipes, TradeStation, Excel, VB. Darryl Tremelling, www.voyagertrading.net 508-881-8849.
80
Classified advertising works! Call Jennifer Testa @ 847-526-7434 jtesta@aip.com
Trading Systems
Trading Systems
Trading Systems
NEW - REAL TIME ACCOUNT PERFORMANCES!
Checkmate, Synergy & Fusion Trading Systems www.TradersTech.Net 500+ Trading Systems...1 Website
SP500guru.com
Daily Market Direction & WarRoom, 6th yr of 90% ACCURACY Timing SP with 1 point stop Stop 1109, Buy 1110, Target 1116 in 38 mins
BlackjackTrader.com
Proven S&P E-Mini Alerts Free Daily Email
www.SystemRank.com
Watch StepTrader buy & sell eminis Live @
www.vipfutures.com
The combination of Commodity Pricecharts and Pricecharts.com provides traders with the advantage of in-depth coverage of the markets and a view from multiple vantage points. Commodity Price Charts adds perspective to computer-generated charts with a tabloid-size layout, longer daily history and 11 technical studies along with the extremely popular Commitment of Traders Report. In addition, youll also receive 25-year monthly and 5-year weekly charts. Pricecharts.com is the most comprehensive Web site available today for end-of-day data, trading research and information. Its updated daily and includes a daily e-mail written by the Hightower Report.
IN BULL MARKETS IN BEAR MARKETS
INCREDIBLE!!!
WWW.MESASOFTWARE.COM WWW.MESA-SYSTEMS.COM
Trendchannel CapitalFlow Portfolio stocks, bonds, currencies, oil Free Report - charts, trend signals, track record - Trendchannel.com
Are you sick of losing money in the commodity markets? We have the solution. 800-974-8707 firstcapital@ntin.net
Call today and take advantage of our special 3-month offer which includes Commodity Price Charts mailed to you weekly, 25-year monthly and 5-year weekly charts, complete access to Pricecharts.com, free 2004 Commodity Trading Guide, How to get the most from CPC guidebook, and the Guide to Futures trading All for only $99. Get the best of both worlds!
Contact Gary Kamen, Sales Manager Today! (800) 221-4352

81
Trader Profile
BY STEVE ZWICK
Stefano Durdic: Out with the old...
tefano Durdic loves the rubbery flooring in the South and Durdic found himself on the board of BoA International, Chicago Loop loft that houses proprietary trading in charge of exchange-traded derivatives for all of Europe. house Speed Trading Group and high-end brokerage Thats when he noticed waves of traders logging into RedSky Securities. Germany from small prop shops concentrated in Chicago. He Its the same stuff they have on the trading floor of the pitched the bank on offering cutting-edge brokerage for highexchange, he points out, skidding his shoe along the surface. end shops and other parts of the bank in need of sophisticatToo bad its so old. Weve got to get rid of it. ed execution, arguing it would both save money and earn it. Knowing when to abandon the old and embrace the new When the bank said no, he, Traci, and Dara headed back has been a key to Durdics success. The 37-year-old native of to Chicago, where Durdic hooked up with fellow former BoA Oak Brook Terrace, Ill., cut his teeth at the Chicago Board trader Brent Starck and Joe Perry, who he met stateside. Options Exchange and sharpened them at Chicago Research They hired a team of software developers, and essentially creand Trading (CRT) the company that made a fortune ated the entity BoA had turned down. bringing binomial pricing models like Black-Scholes and Red Sky Securities has memberships on 27 exchanges and Cox-Ross-Rubenstein into the pits, leaving more efficient runs a proprietary trading platform called R3, which enables options markets in their wake. trading not just in, but among a variety of instruments: equiDurdic, who holds an ties, futures, single stock honors degree in finance futures, options, cash from the University of Treasuries and forex. Illinois, landed a trading job The functionality with CRT on March 15, appeals to high-net1993 the Ides of March, worth individuals and he points out after earnsmall prop shops, ing respect trading OEX including their own options for the now-defunct eight-trader shop, Speed Harmony Trading. Trading Group. It was an exciting time to Each of Speed join CRT, he recalls, in Tradings traders spepart because they were about cializes in sophisticated to get into equity options for arbitrage and spreading the first time. among instruments A few months later, howwithin one market, and ever, NationsBank bought they are paid according CRT. And since banks to a semi-subjective STEFANO DURDIC werent allowed to trade equicompensation scheme ty options in the United States back then, Durdic and his wife, based on how well traders perform relative to the opportuniTraci, shipped off to CRTs Frankfurt, Germany, office for six ties presented in the markets they manage. to 18 months while NationsBank applied for an exemption. This way, we can have a foot in every market, Durdic They ended up spending seven years at the epicenter of the says. If a cool market suddenly gets hot, we are ready for it. futures industrys electronic revolution. He sees platform development as a key way brokerages can At first, he arbitraged between the Deutsche Terminboerses differentiate themselves from competition, and offers a very Frankfurt screens and the London International Financial CRTesque way of solving the current bandwidth shortage. Futures Exchanges (Liffe) London floor. After becoming comWhy does an exchange have to disseminate implied prices fortable with the then-revolutionary process of electronic tradbased on outright prices? he asks. For every update in an ing, he took over CRTs stock options trading and arbitrage outright futures price, some exchanges publish five updates in desk. By 1995, the options desk had overtaken the DAX desk implied calendar spreads, butterflies, etc. They should limit to become CRT Europes top profit center, and in 1996 Traci themselves to disseminating actual bids, offers and trades, and gave birth to their daughter, Dara. just let end users calculate their own implied prices. A year after Daras arrival came the migration heard round He praises LiffeConnect for letting customers disable clutthe world: DTBs transparent and efficient screens wrestled tery functions and plans on building RedSky into the countrys the bund volume away from Liffe. Durdic, like many others, pre-eminent boutique futures commission merchant for hedge took the message to heart. funds, prop shops and sophisticated individuals. Thats where This was the future, he says. There was no denying it. Ill be concentrating my energies, he says. Im getting a bit In 1998, Bank of America (BoA) took over NationsBank, long in the tooth for trading.
82
PHOTO BY CARL WALANSKI

0105 Futures Mag

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

0105 Futures Mag

Uploaded by

Copyright:

Available Formats

How the Fed affects forex 48 | Patent battle heats up 64

www.futuresmag.com January 2005

US $4.95 CAN $6.95

Markets to face tough test this year

Circle No. 116 or go to www.oners.ims.ca/4545-116

Circle No. 101 or go to www.oners.ims.ca/4545-101

Circle No. 102 or go to www.oners.ims.ca/4545-102

Economic expansion: How solid is it?

EQUITY TRADING TECHNIQUES

44 Open-ended questions for closed-minded people

48 Should forex traders battle the banks?

FUTURES | January 2005

Circle No. 100 or go to www.oners.ims.ca/4545-100

Forex Trader Trend principles,

New for Traders Book Reviews

Trading Places Two new

Dateline January and February Ad Index Trader Profile Stefano Durdic:

Managed Money Review Hot Commodities Coffee, gold, corn

west/east coast sales manager

Futures is a publication of Adams Business Media, a division of MCA Communications, LLC

For reprint information contact: Marla Leopold FosteReprints (800) 382-0808

FUTURES | January 2005

Circle No. 112 or go to www.oners.ims.ca/4545-112

Poor Bens Almanac

FUTURES | January 2005

Staying connected doesnt

My entire financial portfolio is viewable in the palm of my hand.

Get your FREE, 1-Month Trial!

eSignal is a division of Interactive Data Corporation (NYSE: IDC).

B-Master from Trade-System, Inc.

Visit our web-site: www.trade-system.com

Circle No. 106 or go to www.oners.ims.ca/4545-106 or call 888-529-1512

FUTURES | January 2005

Circle No. 146 or go to www.oners.ims.ca/4545-146 or call 800-221-4352

Eurex US drops fees, takes on New York

CHARTVIEW: RIDING THE WAVE OF FX GROWTH

FUTURES | January 2005

Circle No. 114 or go to www.oners.ims.ca/4545-114 or call 888-529-1581

Indexes ditch exclusive listing rights

FUTURES | January 2005

Climate exchange goes online

ANOTHER Q FOR YOU

www.futuresmag.com | January 2005

Whats your resolution?

FUTURES | January 2005

Tools for Every Trader

Call Today for Your Risk-Free, 30-Day Trial!*

eSignal is a division of Interactive Data Corporation (NYSE: IDC)

Two new commissioners at the CFTC

Send news of personnel moves to:

Call today for a FREE introductory package.

FUTURES | January 2005

Circle No. 120 or go to www.oners.ims.ca/4545-120

Managed Money Review

Comparing index returns

Top performers in November

Septembers top CTAs

Top performers in 2004

. . . .+50.10% . . . .+48.28% . . . .+26.23% . . . .+16.34% . . . .+14.22%

www.futuresmag.com | January 2005

Gold (Feb. 05) Daily

FUTURES | January 2005

Corn (Mar. 05) daily